The Demand Curve Conceptual Groundwork

Question 1

What does it mean to demand something in economics?

Answer 1

It refers to effective demand, which is a combination of:

• Desire for a good or service
• Ability to pay for it
• Willingness to pay at a given price

This tripartite structure distinguishes economic demand from mere desire.

Question 2

What is the difference between desire and demand?

Answer 2

Desire is aspirational; demand is transactional.

This distinction is crucial in understanding economic behavior.

Question 3

What are the three components that constitute effective demand?

Answer 3

Effective demand consists of:

• Desire for a good or service
• Ability to pay for it
• Willingness to pay at a given price

Each component is necessary for a demand to be considered effective.

Question 4

True or False: A pauper craving caviar represents effective demand.

Answer 4

False

A pauper lacks both the means and willingness to participate in the market for caviar.

Question 5

Why is the distinction between desire and demand important in economics?

Answer 5

It ensures that psychological yearning is not conflated with market behavior.

This distinction underpins the entire theory of demand.

Question 6

What is the demand curve?

Answer 6

A graphical representation that illustrates the relationship between the price of a good or service and the quantity demanded, holding all other variables constant.

This condition is known as ceteris paribus.

Question 7

What does the vertical axis (Y) of the demand curve represent?

Answer 7

Price (P)

Question 8

What does the horizontal axis (X) of the demand curve represent?

Answer 8

Quantity demanded (Qd)

Question 9

What is the typical slope of the demand curve?

Answer 9

Downward sloping

Question 10

What does the law of demand state?

Answer 10

As the price of a good decreases, ceteris paribus, the quantity demanded increases—and vice versa.

Question 11

What is the Substitution Effect?

Answer 11

As the price of a good falls, it becomes relatively cheaper compared to substitutes, prompting consumers to switch toward it.

Question 12

What is the Income Effect?

Answer 12

A lower price increases the consumer’s real income (purchasing power), enabling them to buy more of the good.

Question 13

What is the Income Effect?

Answer 13

As the price of a good falls, the consumer’s real income rises, meaning their purchasing power increases.

This effect is particularly strong for normal goods.

Question 14

What is the effect of the Income Effect on quantity demanded?

Answer 14

Consumers can afford to buy more of the good without altering their nominal income, leading to a rise in quantity demanded.

Question 15

What does the term ‘illusion of wealth’ refer to?

Answer 15

The same income now stretches further as a result of falling prices.

Question 16

What is the Substitution Effect?

Answer 16

When the price of a good falls, it becomes relatively cheaper compared to other substitute goods.

Question 17

What is the effect of the Substitution Effect on consumer behavior?

Answer 17

Consumers substitute away from the now relatively more expensive alternatives, increasing demand for the now cheaper good.

Question 18

Fill in the blank: ‘Why buy Pepsi when ______ is on sale?’

Answer 18

Coke

Question 19

What is Diminishing Marginal Utility?

Answer 19

The additional satisfaction (utility) gained from consuming an extra unit of a good declines as more of it is consumed.

Question 20

What is the effect of Diminishing Marginal Utility on purchasing behavior?

Answer 20

Consumers will only purchase additional units if the price decreases to compensate for the lower marginal utility.

Question 21

True or False: The first chocolate bar offers the same satisfaction as the fifth.

Answer 21

False

Question 22

What may induce regret when consuming additional units of a good?

Answer 22

The fifth unit unless it’s on sale.

Question 23

What is market demand?

Answer 23

Market Demand = Sum of Individual Demands

Question 24

How is the market demand curve derived?

Answer 24

By horizontally summing individual consumers’ demand curves at each price level

Question 25

What does the market demand curve reflect?

Answer 25

Total quantity demanded by all individuals in the market at various prices

Question 26

What is the formal statement of the Law of Demand?

Answer 26

Ceteris paribus, there exists an inverse relationship between the price of a good and the quantity demanded.

Question 27

What happens to quantity demanded as price falls?

Answer 27

Quantity demanded rises.

Question 28

What happens to quantity demanded as price rises?

Answer 28

Quantity demanded falls.

Question 29

Fill in the blank: Ceteris paribus, there exists an _______ relationship between the price of a good and the quantity demanded.

Answer 29

inverse

Question 30

What does the X-axis of the demand curve represent?

Answer 30

Quantity Demanded (Q) ## Footnote The X-axis shows how much of a good is demanded at various price levels.

Question 31

What does the Y-axis of the demand curve represent?

Answer 31

Price (P) ## Footnote The Y-axis indicates the price of the good being analyzed.

Question 32

What is the shape of the demand curve?

Answer 32

Downward-sloping demand curve ## Footnote This shape indicates that as price decreases, the quantity demanded increases.

Question 33

What does Point A represent on the demand curve?

Answer 33

High price P₁ and low quantity Q₁ ## Footnote Point A illustrates the inverse relationship between price and quantity demanded.

Question 34

What happens to real income at Point A?

Answer 34

Lower real income ## Footnote Higher prices reduce purchasing power, leading to lower real income.

Question 35

What is the income effect at Point A?

Answer 35

Less purchasing power ## Footnote This effect indicates that consumers can buy less due to higher prices.

Question 36

What is the substitution effect at Point A?

Answer 36

Substitutes relatively more attractive ## Footnote Higher prices make alternative goods more appealing, leading to lower demand for the good in question.

Question 37

What does MU represent in the context of Point A?

Answer 37

MU is higher (but cost outweighs it) ## Footnote Marginal Utility (MU) indicates the additional satisfaction from consuming one more unit, but it's not enough to justify the cost at higher prices.

Question 38

What does Point B represent on the demand curve?

Answer 38

Lower price P₂ and higher quantity Q₂ ## Footnote Point B reflects the effect of lower prices on the quantity demanded.

Question 39

What happens to real income at Point B?

Answer 39

Increased real income ## Footnote Lower prices enhance purchasing power, allowing consumers to buy more.

Question 40

What is the substitution effect at Point B?

Answer 40

Substitutes now relatively pricier ## Footnote This effect causes consumers to switch back to the good as alternatives become less attractive.

Question 41

What is the relationship between MU and price at Point B?

Answer 41

MU lower, but offset by price ## Footnote While the marginal utility decreases, the lower price encourages an increase in demand.

Question 42

What are the two distinct but interdependent market systems in a well-functioning market economy?

Answer 42

The goods markets and the factor markets

Question 43

In goods markets, who acts as demanders and who acts as suppliers?

Answer 43

Households act as demanders, Firms act as suppliers

Question 44

What do households consume in goods markets to maximize their utility?

Answer 44

Final goods and services

Question 45

What must households have to translate their preferences into actual market transactions?

Answer 45

Sufficient monetary income

Question 46

In factor markets, what roles do households and firms play?

Answer 46

Households become suppliers, Firms become demanders

Question 47

What types of resources do households supply in factor markets?

Answer 47

* Labour (through employment) * Capital (via ownership of financial or real assets) * Land (via rental or ownership rights)

Question 48

What do firms purchase in factor markets?

Answer 48

Productive resources

Question 49

What forms of compensation do firms pay to households?

Answer 49

* Wages * Interest * Rent * Profits

Question 50

What do households use their income from firms to fund?

Answer 50

Their consumption in the goods market

Question 51

Fill in the blank: Households supply inputs → Firms produce output → Firms pay ______ to households → Households spend income on output produced by firms.

Answer 51

Income

Question 52

True or False: Households act as suppliers in the goods markets.

Answer 52

False

Question 53

What is the economic significance of households' ability to pay in goods markets?

Answer 53

It underpins their demand and translates preferences into actual transactions.

Question 54

What creates a feedback loop between households and firms?

Answer 54

The interaction of inputs supplied by households and outputs produced by firms

Question 55

What is the concept of effective demand?

Answer 55

Demand that is both desired and financially supported.

Question 56

Why is effective demand important in the market?

Answer 56

It highlights that without income, household preferences for consumption are irrelevant.

Question 57

What is a precondition for participation in goods markets?

Answer 57

Household participation in factor markets.

Question 58

What can disrupt factor markets?

Answer 58

Rising unemployment, wage stagnation, capital income inequality.

Question 59

What are the repercussions of disruptions in factor markets?

Answer 59

Profound impacts on aggregate demand in goods markets.

Question 60

In which economic frameworks is effective demand a key insight?

Answer 60

Keynesian and general equilibrium frameworks.

Question 61

Fill in the blank: Effective demand is demand that is both desired and _______.

Answer 61

[financially supported]

Question 62

True or False: Household preferences for consumption are always relevant to the functioning of the market.

Answer 62

False.

Question 63

What does rising unemployment indicate in relation to effective demand?

Answer 63

It can disrupt factor markets and affect aggregate demand.