THEME 1 - Topic 2 - The Nature of Demand

Question 1

What do consumers aim to do?

Answer 1

Maximise utility.

Question 2

What do producers aim to do?

Answer 2

Maximise profits.

Question 3

What does marginal cost equal?

Answer 3

Marginal revenue.

Question 4

Define Notional demand

Answer 4

The desire to possess something.

Question 5

Define Effective demand

Answer 5

The desire to possess something, backed up by the ability to purchase it.

Question 6

Define demand

Answer 6

The quantity of a good/service that consumers choose to buy at any possible price in a given period.

Question 7

Why is the demand curve downward sloping?

Answer 7

Due to the law of Diminishing Marginal Utility.

Question 8

Define the law of Diminishing Marginal Utility

Answer 8

The situation where individuals gain less additional utility from a consuming a product, the more it is consumed.

Question 9

Define the Demand curve

Answer 9

A graph showing the quantity demanded of a good/service at any given price.

Question 10

What causes a movement along the Demand curve?

Answer 10

A change in price.

Question 11

What does a movement up the Demand curve cause?

Answer 11

A contraction in demand.
A decrease in quantity demanded.

Question 12

What does a movement down the Demand curve cause?

Answer 12

An extension in demand.
An increase in quantity demanded.

Question 13

Define the Law of Demand

Answer 13

States that there is an inverse relationship between price and quantity demanded of a good/service following ceteris paribus.

Question 14

What causes a shift in the Demand curve?

Answer 14

A change in anything other than price.

Question 15

What does a shift left of the Demand curve cause?

Answer 15

A decrease in demand.

Question 16

What does a shift right of the demand curve cause?

Answer 16

An increase in demand.

Question 17

What are the Determinants of Demand?

Answer 17

PASIFIC

Population
Advertising
Substitute’s price
Income
Fashion/Taste
Interest rates/Legislation
Complement’s price

Question 18

Define a normal good

Answer 18

Is when the quantity demanded increases in response to an increase in consumer incomes.

Question 19

Define an inferior good

Answer 19

Is when the quantity demanded decreases in response to an increase in consumers goods.

Question 20

Define a substitute

Answer 20

2 goods that are in competitive demand. Demand will increase if the price of a substitute increases.

Question 21

Define a complement

Answer 21

2 good that are in joint demand. Demand will decrease if the price of a complement increases.

Question 22

Define elasticity

Answer 22

A measure of the responsiveness of quantity demanded to a change in a variable which affects it.

Question 23

Define Price Elasticity of Demand (PED)

Answer 23

A measure of the responsiveness of quantity demanded of a good/service to a change in its price.

Question 24

What is the formula for PED?

Answer 24

% Change in Quantity Demanded
____________________________________

% Change in price

Question 25

Define price elastic in demand

Answer 25

When the percentage change in quantity demanded of a good/service is more proportional than the percentage change in price. Consumers are sensitive to a change in price.

Question 26

Define price inelastic in demand

Answer 26

When the percentage change in quantity demanded of a good/service is less proportional than the percentage change in price. Consumers aren't too sensitive to a change in price.

Question 27

Define unitary price elastic in demand

Answer 27

When the percentage change in quantity demanded of a good/service leads is exact and opposite to the percentage change in price.

Question 28

Define perfectly price elastic in demand

Answer 28

When consumers demand an unlimited quantity of a good/service at a certain price.

Question 29

Define perfectly price inelastic in demand

Answer 29

When the quantity demanded of a good/service will not change to an increase/decrease in price.

Question 30

What is the value of PED for a good which in price elastic in demand?

Answer 30

Greater than 1 and less than infinity.

Question 31

What is the value of PED for a good which is price inelastic in demand?

Answer 31

Less than 1 but greater than 0.5

Question 32

What is the value of PED for a good which in unitary elastic in demand?

Answer 32

Exactly 1.

Question 33

What is the value of PED for a good which is perfectly price elastic in demand?

Answer 33

Infinity.

Question 34

What is the value of PED for a good which is perfectly price inelastic in demand?

Answer 34

0.

Question 35

What is the value of PED always?

Answer 35

Negative

Question 36

What are the Determinants of PED?

Answer 36

SPLAT Substitutes (no.) Percentage of Income Luxury/Necessity Addictive/Habit forming Time period

Question 37

Define Income Elasticity of Demand (YED)

Answer 37

A measure of the responsive of quantity demanded to a change in income.

Question 38

What is the formula for YED?

Answer 38

% Change in quantity demanded __________________________________ % Change in Income

Question 39

What is the value of YED if the good is Income elastic in Demand?

Answer 39

Greater than +1 and less than -1.

Question 40

What is the value of YED for a good which is Income inelastic in demand

Answer 40

Between -1 and +1.

Question 41

Normal goods have what value of YED?

Answer 41

Positive.

Question 42

Inferior goods have what value of YED?

Answer 42

Negative.

Question 43

Define cross-price elasticity of demand (XED)

Answer 43

A measure of the responsiveness of quantity demanded of good/service, to a change in the price of some other good/service.

Question 44

What is the formula for XED?

Answer 44

% Change in quantity demanded of good A __________________________________________ % Change in price of good B

Question 45

What is the good if the XED is positive?

Answer 45

Substitute.

Question 46

What is the good if the XED is negative?

Answer 46

Complement.

Question 47

If the XED value is between 1 and -1, what type of good is it?

Answer 47

Weak substitute/complement.

Question 48

If the XED value is greater than +1 and less than -1, what type of good is it?

Answer 48

Strong substitute/complement.

Question 49

Define notional demand

Answer 49

The desire to possess something.

Question 50

Define effective demand

Answer 50

The desire to possess something, backed up by the ability to pay for it.

Question 51

Define a shift in demand

Answer 51

Occurs when anything changed other than price. Cause an increase/decrease in demand.

Question 52

Define a movement in demand

Answer 52

Occurs when there is a change in price of a good. Cause an expansion/contraction in demand.

Question 53

What are the determinants of PED?

Answer 53

SPLAT Substitute availability Proportion of income Luxury/necessity Addictiveness Time period