Topic 3 - Supply And Demand

Question 1

What is demand?

Answer 1

The quantity of a good or service that consumers are willing and able to buy at a particular price and time

Question 2

Describe the law of demand

Answer 2

There is an inverse relationship between the price of a good and the demand of a good. This means if price goes up, demand falls and vice versa.

Question 3

What do demand curves slope downwards from left to right?

Why does demand fall when prices rise?

Answer 3

Income effect
Substitution effect 
The law of diminishing marginal utility 
Willingness to buy 
Ability to buy

Question 4

Explain the substitution effect

Answer 4

As the price of a good rises people are more likely to switch to a similar product, as this seems better value for money

Question 5

Explain the law of diminishing marginal utility

Answer 5

A consumer will but one good, let’s say ice lollies, and will pay a lot of it but they will pay less for the next one and even less for the one after that. As consumption rises, consumers are less willing to pay for each extra unit because their marginal utility (satisfaction) is falling.

Question 6

What happens when prices change on the demand curve

Answer 6

It either contracts or extends, it moves along the demand curve.
If the quantity demanded rises it extends, if the quantity demanded falls it contracts.