2.2 Demand

Question 1

What is meant by demand?

Answer 1

The willingness and ability to purchase a god or service at the given price in a given time period.

Question 2

What is derived demand? Give an example.

Answer 2

Demand that comes about due to demand for another product. For example, demand for popcorn at a cinema depends on the demand for movie tickets.

Question 3

What is the law of demand?

Answer 3

The quantity demanded is inversely proportionate to the price of a good or service.

Question 4

How is a demand curve generally drawn?

Answer 4

The demand curve slopes downwards and is plotted between price (y axis) and the quantity demanded (x axis). The demand curve has to be labelled with a ‘D’.

Question 5

What is individual demand?

Answer 5

The demand for a good or service by an individual consumer. It doesn’t show us the actual amount bought since we don’t know anything about the supply.

Question 6

What is market demand?

Answer 6

The total demand for a good or service found by adding together all the individual demands.

Question 7

What is a movement along the demand curve and why is it caused?

Answer 7

It is caused by change in price (due to a change in supply) which leads to a movement up or down the existing demand curve.

Question 8

What would happen to the demand diagram if prices change?

Answer 8

If prices fall, there would be an expansion (more) demand. This would cause a movement down the curve.

If prices rise, there would be a contraction (less) demand. This would cause a movement up the curve.

Question 9

For movements along the demand curve, what is the correlation between price and quantity?

Answer 9

They move in opposite directions.

Question 10

If there is rise in the price of a good or service, how would it affect the consumer and firm?

Consequence

Answer 10

Rises in price of a good or service lead to a fall in quantity and demand. Consumers would buy fewer goods and therefore sales and profits would fall.

Question 11

If there is fall in the price of a good or service, how would it affect the consumer and firm?

Consequence

Answer 11

If a price of a good or service decreases, the quantity and demand will increase. Therefore, consumers would buy more goods and businesses would have higher profits and employ more workers.

Question 12

What is a shift along the demand curve and why is it caused?

Answer 12

It is caused by non - price factors and this leads to a complete movement of the existing demand curve either to the right or to the left.

Question 13

What are factors that cause a shift in demand?

Answer 13

• Changes in tastes and fashion
• Higher disposable income
• Substitutes
• Complements

Question 14

What is a substitute? Give an example.

Answer 14

A good or service that can be used as a replacement of another. For example, Pepsi and Cola.

Question 15

What is a complement? Give an example.

Answer 15

A good or service that can be bought or used together. For example, fish and chips.

Question 16

What are more factors that cause a shift in demand?

Answer 16

• Population
• Marketing
• Government policies (subsidies and tax)
• Expectation of a price rise

Question 17

What is a subsidy?

Answer 17

An amount of money a government gives directly to firms to encourage production and consumption.

Question 18

For shifts along the demand curve, what is the correlation between price and quantity?

Answer 18

Mostly price and quantity will move in the same direction.

Question 19

What happens if there is a rightward shift (increase) in demand?

Consequence

Answer 19

Both price and quantity rise.

Question 20

What happens if there is a leftward shift (decrease) in demand?

Consequence

Answer 20

Both price and quantity fall.

Question 21

What are some exceptions to this?

Answer 21

• If a substitute is preferred, demand will fall even if prices fall
• Increases in demand can allow a firm to gain economies of scale so they can cut prices
• Incomes can rise faster than prices so consumers may demand more

Question 22

What is price elasticity of demand (PED)?

Answer 22

The responsiveness of quantity demanded to a change in price of the product.

Question 23

What is elastic demand?

Answer 23

When price is changed, it leads to a larger change in quantity demanded.

Question 24

What is inelastic demand?

Answer 24

When price is changed, it causes a minor change in quantity demanded.

Question 25

How is PED calculated?

Answer 25

% change in quantity demanded / % change in price

Question 26

How is percentage change calculated?

Answer 26

(Difference/ original) x 100

Question 27

What does a PED value of 0 mean?

Answer 27

That demand is perfectly inelastic and that there would be no change in demand if prices are changed.

Question 28

What does a PED value between 0 and 1 mean?

Answer 28

That demand is inelastic and change in demand is less than the change in price.

Question 29

What are 3 examples of inelastic goods?

Answer 29

1) Petrol
2) Cigarettes
3) Coffee

Question 30

What does a PED value of 1 mean?

Answer 30

That PED is unitary price elastic and the change in price will lead to the exact change in demand.

Question 31

What does a PED value of greater than 1 mean?

Answer 31

That the good or service is inelastic so the change in quantity demanded is higher than the change in price.

Question 32

What does a PED value of ∞ mean?

Answer 32

That PED is perfectly price elastic meaning that an infinite amount can be demanded at a given price (so price shouldn’t be changed at all).

Question 33

What factors can affect PED?

Answer 33

• Time
• Income
• Nature of good
• Brand loyalty
• Competitor pricing

Question 34

Why is PED important for consumers?

Answer 34

1) The government can increase taxes if PED for a good or service is inelastic.

2) Consumer’s PED can depend on the weather and time of year for example.

Question 35

Why is PED important for producers?

Answer 35

1) Allows producers to maximise their revenue such as charging more for inelastic goods.

2) Can charge different prices to different groups of consumers.