Demand

Question 1

Define demand

Answer 1

The quantity of a good or service that consumers are willing and able to purchase a a given price in a given time period

Question 2

Law of demand

Answer 2

Inverse relationship between price and quantity demanded - decrease in price will increase Qd and vice versa, ceteris paribus

Question 3

Assumptions underlying the law of demand

Answer 3

1. The income effect
2. The substitution effect
3. Law of diminishing marginal returns

Question 4

What is the income effect?

Answer 4

As the price decrease consumers increase their “real income” - extra amount of money to spend on buying more of the product

Question 5

What is the substitution effect?

Answer 5

As price decreases the product becomes more attractive than other product whose prices remain the same - consumer will substitute consumption of other goods for an extra amount of the product

Question 6

What is the law of diminishing marginal returns?

Answer 6

The extra utility gained from consuming one more unit of a good diminishes - consumers willing to pay less and less for an extra unit of a good

Question 7

The relationship between the individual consumer’s demand and the market’s demand

Answer 7

Consumer A is willing to purchase 3 units at 7$ and consumer B is willing to buy 8 units at 7$. The market will show a demand of 11 units at 7$

Question 8

“Change in Qd” refers to…

Answer 8

movement along an existing demand curve due to a change in price

Question 9

“Change in demand” refers to…

Answer 9

a shift of the demand curve

Question 10

What causes a shift of the demand curve?

Answer 10

Changes in non-price determinants of demand:
1. Income
2. Price of related goods
3. Tastes and preferences
4. Future price expectations
5. Number of consumers

Question 11

Income as a non-price determinant of demand

Answer 11

• Normal goods
• as income rises demand for normal goods will rise as well and vice versa - d-curve shifts either right or left
• Inferior goods
• as income rises demand for inferior goods will fall - ex. off-brand cola

Question 12

The price of related goods as a non-price determinant of demand

Answer 12

• Substitutes
• If two products are substitutes an increase in the price of one will lead to an increase in demand for the other
• Complements
• If two products are complements a decrease in price of one product will increase demand of the other despite no price change occurring on that market - ex. knives and forks

Question 13

Tastes and preferences as non-price determinants of demand

Answer 13

Influence by ex. fashion or awareness campaigns can cause either a fall or increase in demand

Question 14

Future price expectations as non-price determinants of demand

Answer 14

If consumers believe prices will increase in the future they’ll increase demand in the present and vice versa

Question 15

Number of consumers as a non-price determinant of demand

Answer 15

Change in the composition of the population or a change in demographics will result in change of demand - ex. baby-boom or immigration