Nature of demand

Question 1

Define profit.

Answer 1

total revenue from selling product less total cost of producing it

Question 2

What do rational consumers aim to maximise?

Answer 2

their utility

Question 3

Define demand.

Answer 3

quantity of good or service that consumers are willing and able to buy at any given price in a given period

Question 4

What are the four key influences on demand?

Answer 4

• price of good or service
• price of other goods or services
• income
• preferences

Question 5

Define marginal utility.

Answer 5

additional utility gained from consuming an extra unit of a good or service

Question 6

Explain diminishing marginal utility.

Answer 6

The marginal utility from consuming a good usually declines as you consumer more of it.

Question 7

What is the law of demand?

Answer 7

There is an inverse relationship between quantity demanded and proce of a good or service, ceteris paribus.

Question 8

What does a demand curve show?

Answer 8

how much of a good or service will be demanded by consumers at any given price

Question 9

What two effects make the demand curve downward sloping?

Answer 9

• real income effect (at higher price, consumer has less income left)
• substitution effect (at higher price, other goods relatively more attractive)

Question 10

Is an increase in demand shown by move in demand curve or move along demand curve?

Answer 10

move in demand curve

Question 11

Is an extension of demand shown by move in demand curve or move along demand curve?

Answer 11

move along demand curve

Question 12

Why do demand curves sometimes slope upwards?

Answer 12

Snob effect or Veblen effect - where people value others knowing they are rich enough to affor a good with a high price, eg Rolex

Question 13

Define a normal good.

Answer 13

a good where quantity demanded increases with consumer incomes

Question 14

Define an inferior good

Answer 14

a good where quantity demanded falls with consumer incomes

Question 15

Define a Giffen good.

Answer 15

a good where the real income effect is stronger than the substitution effect, so a price fall leads to lower demand

Question 16

Define substitute goods.

Answer 16

Where demand for one is likely to rise if price of other rises.

Question 17

Define complements.

Answer 17

Where demand for one is likely to fall if price of other rises.

Question 18

Define elasticity.

Answer 18

a measure of sensitivity of one variable to changes in another variable

Question 19

What does price elasticity of demand measure?

Answer 19

sensitivity of quantity demanded to change in price of good or service

Question 20

What is the formula for price elasticity of demand ?

Answer 20

% change in quantity demanded
/ % change in price

Question 21

Define elastic.

Answer 21

when 1 < abs(elasticity) < infinity

Question 22

Define inelastic.

Answer 22

when 0 < abs(elasticity) < 1

Question 23

Define unitary elastic.

Answer 23

when abs(elasticity) = 1

Question 24

Is price elasticity of demand normally positive or negative?

Answer 24

negative

Question 25

What values can PED take when demand is inelastic?

Answer 25

-1 < PED < 0

Question 26

What values can PED take when demand is elastic?

Answer 26

PED < -1

Question 27

If PED is elastic and price increases, what happens to total revenue?

Answer 27

It falls.

Question 28

If PED is inelastic and price increases, what happens to total revenue?

Answer 28

It rises.

Question 29

If PED is inelastic and price falls, what happens to total revenue?

Answer 29

It falls.

Question 30

If PED is elastic and price falls, what happens to total revenue?

Answer 30

It rises.

Question 32

If demand is perfectly inelastic, what happens to demand if the price rises?

Answer 32

no change

Question 33

What value does PED have if demand is perfectly inelastic?

Answer 33

0

Question 34

What value does PED have if demand is perfectly elastic?

Answer 34

infinity

Question 35

What are the four key influences on PED?

Answer 35

* availability of substitutes * whether item is perceived as necessity or luxury * relative share of the good or service in overall expenditure * time period

Question 36

What does *income elasticity of demand* (YED) measure?

Answer 36

sensitivity of quantity demanded to change in consumer income

Question 37

If a good is a necessity, what possible values can YED have?

Answer 37

0 < YED < 1

Question 38

If a good is a luxury, what possible values can YED have?

Answer 38

YED > 1

Question 39

What is the formula for *income elasticity of demand*?

Answer 39

YED = % change in quantity demanded / % change in consumer income

Question 40

If YED < 0, is the good normal or inferior?

Answer 40

inferior

Question 41

If YED > 0, is the good normal or inferior?

Answer 41

normal

Question 42

What does *cross elasticity of demand* (XED) measure?

Answer 42

sensitity of quantity demanded to a change in the price of another good or service

Question 43

What is the formula for cross elasticity of demand?

Answer 43

XED = % change in quantity demanded of good X / % change in price of good Y

Question 44

If XED > 0, are the good substitutes or complements?

Answer 44

substitutes

Question 45

If XED < 0, are the good substitutes or complements?

Answer 45

complements