Which principle states that consumers drive production decisions based on their demand preferences?

The principle that states that consumers drive production decisions based on their demand preferences is known as consumer sovereignty. This concept emphasizes that in a market economy, the desires and needs of consumers dictate what goods and services are produced. When consumers express their preferences through their purchasing decisions, businesses respond by adjusting their production to align with those preferences. Essentially, consumers have the power to influence the market by determining which products succeed or fail based on their willingness to buy.

In contrast, aggregate demand refers to the total demand for goods and services within an economy at a given overall price level and in a given time period, but it does not specifically highlight the active role of consumers in shaping production decisions. Disequilibrium pertains to situations where supply and demand are out of balance, while the circular flow of income illustrates the movement of money through an economy but does not focus specifically on consumer influence over production. Thus, consumer sovereignty directly captures the essence of consumer influence on production.