AOS 2 part 1- demand curve

Question 1

market

Answer 1

any place or arrangement that facilitates the exchange of products between buyers and sellers

Question 2

perfectly competitive market

Answer 2

a theoretical or hypothetical market where
competition is at its greatest possible level

Question 3

conditions for perfectly competitive markets

Answer 3

1. Homogenous products (products being sold are identical)
2. Ease of entry/exit
3. Large number of buyers and sellers
4. Perfect knowledge (makes it easy to make fully informed rational choices)
5. Rational buyers and sellers (buyers try to maximise utility/satisfaction, sellers try to maximise profit)
6. Mobile resources
   resources can be quickly and easily shifted from one market to another in response to changes in profitability.

7.Sovereignty for consumers (consumers have power to decide what is produced in market)

Question 4

demand

Answer 4

represents the willingness and ability of consumers to purchase goods and services.

Question 5

the law of demand

Answer 5

there is an inverse relationship between price and
quantity demanded.

Question 6

As the price decreases, the quantity demanded…
As the price increases, the quantity demanded…

Answer 6

As the price decreases, the quantity demanded expands/increases

As the price increases, the quantity demanded contracts/decreases

Question 7

Income effect

Answer 7

When a product becomes more expensive, fewer people have the income needed to buy it, so the quantity demanded contracts.

Question 8

substitution effect

Answer 8

When a product becomes more expensive, some buyers will look for cheaper alternatives or substitutes, so the quantity demanded contracts/falls.

Question 9

the demand curve shows

Answer 9

the total quantity of the product demanded at any
given price

Question 10

A fully labelled D curve has

Answer 10

Label on the y axis - price

Label on the x axis - quantity

Heading/title

A downward sloping D curve

Question 11

as price changes there is a

Answer 11

movement along the D curve

Question 12

When demand moves down along the curve

Answer 12

demand has expanded (quantity has gone up)

Question 13

When demand moves up along the curve,

Answer 13

demand has contracted (quantity has gone down)

Question 14

shift of the demand curve is caused by

Answer 14

things other than price, the demand for something has increased or decreased at every price level.

Question 15

if the demand curve shifts to the right….
if the demand curve shifts to the left….

Answer 15

it means that quantity demanded has increased at every price level

it means that quantity demanded has decreased at every price level

Question 16

factors that cause a shift in the demand curve

Answer 16

Changes in disposable income

Prices of substitutes and complements

Preferences and tastes

Interest rates

Changes in population and demographics

Consumer confidence

Question 17

changes in disposable income

Answer 17

the amount that consumers actually have to spend on
goods and services so wages-minus taxes
, increase in disposable = increase in demand meaning curve shifts to the right vice versa

Question 18

Prices of substitutes and complements

Answer 18

A substitute product is one that can be consumed instead of the product in question/focus.

Increase price of substitute →increased demand for goods at all price levels so shift demand curve right

Complementary products are products that are normally consumed together, though they are sold separately

Increase price of complement → decreased demand for goods at all price levels so shift demand curve left

Question 19

Preferences and tastes

Answer 19

Over time, people’s tastes change → their demand for goods and services change

Change of preference/tastes in favour of the product → increased demand for goods at all price levels → shift demand curve right
Change of preference/tastes away from the product → decreased demand for goods at all price levels → shift demand curve left

Question 20

Interest rates

Answer 20

the reward you get for saving/lending your money or the cost of borrowing other people’s money
overall, consumers borrow more than they save

For indebted households (those who have borrowed more than they have saved), an increase in interest rates → increase in interest payments → decrease in money left over for spending → decrease demand for products at all price levels → demand curve shifts left

For those minority of households who actually have net savings (they have more money in interest earning accounts than they have borrowed), an increase in interest rates → increase in interest income → increase in demand for products at all price levels → demand curve shifts right

Question 21

Changes in population and demographics

Answer 21

So if the population of consumers grows, this shifts the entire demand curve to the right - there are more people seeking goods and services at every price level along the D curve
Similarly, a decrease in the population shifts the entire demand curve to the left – fewer people to but the stuff

So when the characteristics of the population change, there might be a change in the demand for products – and therefore a shist in the demand curve

Question 22

Consumer confidence

Answer 22

Consumer confidence measures the general expectations of the future state of the economy and future economic prosperity

So improved consumer sentiment → ↑ willingness to consume → ↑ demand especially for wants/discretionary items → demand curve shifts right
So declining consumer sentiment → ↓ willingness to consume → ↓ demand especially for wants/discretionary items → demand curve shifts left

Question 23

What is the distinction between a movement along the demand curve and a shift of the demand curve?

Answer 23

A change in price does not cause a shift of the D curve – it causes a movement along the curve
A change in anything other than price causes a shift of the D curve