Nature of Demand

Question 1

What is the definition of demand

Answer 1

The quantity of goods/services a person/group is willing and able to buy at various prices

Question 2

Why is the demand curve downward sloping?

Answer 2

Diminishing marginal utility
- Reduced amount of extra satisfaction from each extra unit bought

Question 3

What causes a movement along the demand curve?

Answer 3

Change in price

Question 4

What causes a shift in the demand curve?

Answer 4

PASIFIC
- Population
- Advertising
- Substitute goods
- Income
- Fashion/trends
- Interest rates
- Complementary goods

Question 5

What is PED and how to calculate it

Answer 5

The responsiveness of demand to a change in price

%C in QD / %C in P

Question 6

What are the values for elastic and inelastic

Answer 6

-1 to 1 = inelastic
Over or below 1 and -1 is elastic

Question 7

What influences PED

Answer 7

• Availability of substitutes
• Type of good (necessity or luxury)
• What proportion of income is involved
• Time period under consideration
• Addiction

Question 8

What is YED and how do we calculate it

Answer 8

A measure of the sensitivity of demand considering a change in consumer income

%C in QD / %C in Income

Question 9

Explain inferior and normal goods

Answer 9

YED < 0 = inferior good
0 < YED < 1 = necessity good
YED > 1 = luxury good

Question 10

What is XED? And how do we calculate it

Answer 10

Cross elasticity of demand - sensitivity of QD for one good to the change in price of another good

%C in QDX / %C in PY

Question 11

How can we determine the relationship between 2 goods from their XED

Answer 11

Under 0 = complement
Over 0 = substitute

Inelastic = weak complement or substitute
Elastic = strong substitute or complement