1.2.2 Demand

Question 1

What is Demand?

Answer 1

The ability and willingness to buy a particular good at a given price and at a given moment in time

Question 2

What is movement along the demand curve caused by?

Answer 2

A movement along the demand curve is caused by a change in the price of the good.

Question 3

What is a shift of the demand curve caused by?

Answer 3

A shift of the demand curve is caused by a change in any of the factors which affect demand, the conditions of demand.

Question 4

Describe the movement from point A to B

Answer 4

A movement from A to B is a contraction in demand, the quantity demanded falls because of an increase in price.

Question 5

Describe the movement from point A to C

Answer 5

A movement from A to C is an extension in demand, the quantity demanded rises due to a decrease in price.

Question 6

Describe the shift from D1 to D2

Answer 6

• A shift from D1 to D2 is a decrease in demand, because fewer goods are demanded at each and every price.
• For example, at price P only Q2 goods are demanded rather than Q1 goods.

Question 7

Describe the shift from D1 to D3

Answer 7

• A shift from D1 to D3 is an increase in demand, as more goods are demanded at each and every price.
• Now, Q3 goods are demanded at price P.

Question 8

What is the relationship between Demand and Price?

Answer 8

Inverse Relationship

Question 9

What is the mnemonic used for the conditions of demand?

Answer 9

PIRATES:
- Population
- Income
- Related goods
- Advertising
- Taste/fashion
- Expectations
- Seasons
- Government legislation

Question 10

How does population cause the demand curve to shift?

Answer 10

• If population rises, we would expect demand for all products to increase and so the demand curve will shift to the right.
• This is because the more people there are in the country, the more people who will want a good.

Question 11

How does Income cause the demand curve to shift?

Answer 11

• For most goods, if income increases, demand increases because a person can afford to buy more of the product.
• If there is a fall in income then the demand would decrease and shift to the left. However, for some goods an increase in income can lead to a fall in demand and vice versa, this is a concept called income elasticity of demand.

Question 12

How does Related goods cause the demand curve to shift?

Answer 12

• If goods are complements or substitutes of each other then a change in the price of another good can cause a shift in the demand curve.
• An increase in the price of Nike trainers would lead to a contraction in demand for Nike trainers and an increase in demand of Adidas trainers, as we would expect people to buy them instead.
• If the price of DVD players drops, demand for DVD players would extend and we would expect the demand curve for DVDs to increase.

Question 13

How does Advertising cause the demand curve to shift?

Answer 13

• If a firm carries out a successful advertising campaign, demand is likely to increase.
• If a competitor firm carries out a successful advertising campaign demand for the first firm will fall.
• A successful advertising campaign by Tesco will increase demand for Tesco but reduce demand for Asda.

Question 14

How does Taste/fashion cause the demand curve to shift?

Answer 14

If something becomes more fashionable, we expect demand to increase and if it becomes less fashionable, then demand will fall.

Question 15

How does Expectations cause the demand curve to shift?

Answer 15

• Expectations of what might happen in the future can have a big impact on the level of demand for some goods.
• If people expect a shortage of something, or that price will rise in the future, then demand for that product will increase.
• If people expect that price will fall in the future, demand will decrease.

Question 16

How does seasons cause the demand curve to shift?

Answer 16

• Some products will find their demand affected by the weather.
• For example, hot summers cause an increase in demand for sun cream whilst wet summers cause a decrease in demand for umbrellas.

Question 17

How does Government Legislation cause the demand curve to shift?

Answer 17

• Government legislation can also have an effect on the demand for goods.
• Demand for car seats increased after the government made it a legal requirement that young children have to sit in them

Question 18

What does the Law of Diminishing Marginal Utility state?

Answer 18

The satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed, assuming the consumption of all other goods remains constant.

Question 19

How do we explain or predict how people will spend their money?

Answer 19

We have to assume that they are going to behave rationally, expecting them to spend it according to
what gives them the greatest level of satisfaction or welfare.

Question 20

What is Total Utility?

Answer 20

Total utility represents the satisfaction gained by a customer as a result of their overall consumption of a good e.g. the satisfaction of eating the whole bar of chocolate

Question 21

What is marginal Utility?

Answer 21

The change in satisfaction resulting from the consumption of the next unit of a good e.g. the increased satisfaction by eating another bite of chocolate.

Question 22

What type of consumption is shown on this graph?

Answer 22

• Conspicuous Consumption ‘Snob effect’

Where people gain from value from having other people notice that they are rich enough to consume these goods. Eg Rolex watches.

Question 23

Which Gradient is a Normal Good and which is an inferior Good?

Answer 23

BLUE: Normal Good
BLACK: Inferior Good

Question 24

Give an example of an Inferior Good

Answer 24

Bus Travel

Question 25

What are substitutes?

Answer 25

• Substitutes are where you either buy one good or the other, for example you either buy a pair of Nike trainers or a pair of Adidas trainers.

Question 26

What are compliments?

Answer 26

Complements are goods such as DVDs and DVD players where if you have one, you need the other to go with it.