Theory Of Demand And Supply

Question 1

What do you know about market

Answer 1

A market is any arrangement
that brings buyers and sellers together to exchange goods or services. For any market, the demand side constitutes buyers of a good or service and the supply side constitutes the sellers of the same good or service. Thus, any market is comprised of consumers and producers.

Question 2

What is demand

Answer 2

Demand is willingness and ability of a consumer to purchase a certain quantity of a good or service at a prevailing market price in a given period

Question 3

What is the difference between demand and desire

Answer 3

Demand is not the same as desire, need or want. Desire is a wish to have a good based on
its intrinsic qualities. Ability goes with the purchasing power of a consumer and hence, demand entails the willingness and ability to put one’s desires into effect.
The term demand is used as the short form of effective demand, which happens
when a consumer desires to buy a good or service and has the ability to afford it

Question 4

What is the quantity demand

Answer 4

Quantity demanded is an amount of any good or service that consumers are willing
and able to buy during a specific period at a given price.

Question 5

Explain in detail on quantity demanded

Answer 5

Many factors influence the quantity demanded for goods
and services. They include price of that good or service, a consumer’s income
and prices of the related goods or services, among other factors. However, the
price of a good or service remains the most important factor among them. Thus,
in practice, demand is the relationship between the quantity demanded of a good
and the price of that good. That is to say, holding constant all other factors that
affect demand, the quantity demanded of a good varies negatively with its own
price.

Question 6

Elaborate the law of demand

Answer 6

The law of demand implies existence of an inverse(negative) relationship between the price of a good or service and its quantity that consumers are willing
and able to purchase, other factors remaining constant.

Question 7

What are the assumptions about the law of demand

Answer 7

*The law of demand operates only when changes in consumers’ incomes are not considered. That is, the consumer’s purchasing power must remain constant.
*There should be no change of taste and preferences of the consumer
*prices of all other interrelated goods should not vary
*the law assumes that consumers do not expect future changes in price

Question 8

What is a demand schedule

Answer 8

Is a table that presents a list of quantities of a good or service demanded at a given price, when all other factors influencing demand for the good remains the same.

Question 9

Name the two types of demand schedule

Answer 9

-Individual demand schedule
-Market demand schedule.

Question 10

Elaborate individual demand schedule

Answer 10

Is a table that shows a list of quantities of a good or service demanded by an individual consumer at each price, when all other factors affecting its demand remain unchanged.

Question 11

Elaborate market demand schedule

Answer 11

Is a table showing a list of quantities demanded of a good or service by all consumers in the market at each price of a good or service, when all other factors that affect its demand remain constant

Question 12

What is to be considered in market demand schedule

Answer 12

Note that to get the market demand schedule, one would sum up quantities demanded by all individuals at each given price, and not the prices. This is called horizontal summation, since the summation is across each row

Question 13

What is a demand curve

Answer 13

is a graphical representation of a demand schedule, which shows the relationship between price of a good or service on the y-axis and the quantity demanded on the x-axis, assuming other factors affecting demand remain unchanged

Question 14

Name the two types of demand curve

Answer 14

Individual and market demand curve

Question 15

What is an individual demand curve

Answer 15

This is a curve showing different quantities of a good or service demanded by an individual at each price, when all other factors affecting demand remain constant.

Question 16

Where do a normal or typical demand slopes

Answer 16

From left to right

Question 17

What does a negative slope of demand curve mean

Answer 17

It means an inverse (negative) relationship between price and quantity demanded

Question 18

What is individual and market demand curves

Answer 18

It is the horizontal sum of all individual demand curves for a particular good or service

Question 19

Why is the demand curve downward sloping from left to right

Answer 19

Consumers buy more of a good or service when its price falls, and less of it when its price rises

Question 20

What are the two effects causing the demand curve to slope from left to right

Answer 20

The income effect and the substitution effect.

Question 21

What is a normal good

Answer 21

Are goods whose demand increases as income increases

Question 22

What are inferior goods

Answer 22

Are goods whose demand decreases as income increases

Question 23

What do you know about exceptions of the law of demand

Answer 23

The demand for a good or service varies directly with price such that the higher the price, the more the quantity that will be demanded, and vice versa

Question 24

What are the reasons for the existence of exceptions to the law of demand

Answer 24

*Giffen good
*Veblen goods
*Expectation of future change in price
*Necessities

Question 25

Explain Giffen good

Answer 25

**Sir Robert Giffen(1837-1910)** This is a specific type of inferior goods, whose consumption falls when a consumer's income increases. While other inferior goods obey the law of demand, Giffen goods do not. When the price of a Giffen good increases, its quantity demanded also increases, and vice versa. *Note that all Giffen goods are inferior goods but not all inferior goods are Giffen goods*

Question 26

Elaborate veblen goods

Answer 26

**Thorstein Veblen(1857-1929)** According to Veblen, there are certain luxury goods that become more valuable as their price increases. This is snob value, since it emanates from the ostentatious behaviour of people with very high income. The more expensive the good is, the more it becomes attractive to some consumers, causing its demand to increase as its price rise