1.2.2 Demand

Question 1

What is demand

Answer 1

Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

Question 2

What causes movements along the demand curve 1.2.2a (1)

Answer 2

If price is the only factor that changes (ceteris paribus), there will be a change in the QD (quantity demanded)
This change is shown by a movement along the demand curve

Question 3

What is a demand curve

Answer 3

A demand curve is a graphical representation of the price and quantity demanded (QD) by consumers

Question 4

What is the law of demand

Answer 4

Ceteris paribus, as the price of a good increases, quantity demanded decreases ; conversely as the price of a good decreases, quantity demanded increases
There is an inverse relationship between price + QD

Question 5

Why is there a downward slope (inverse relationship)

Answer 5

Income effect
Substitution effect
Law of diminishing marginal utility

Question 6

Explain what happens when you move from point A-B on the demand curve (3)

Answer 6

An increase in price from £10 to £15 leads to a movement up the demand curve from point A to B
Due to the increase in price, the QD has fallen from 10 to 7 units
This movement is called a contraction in QD

Question 7

Explain what happens when you move from point A-C on the demand curve

Answer 7

A decrease in price from £10 to £5 leads to a movement down the demand curve from point A to point C
Due to the decrease in price, the QD has increased from 10 to 15 units
This movement is called an extension in QD

Question 8

What do price factors cause

Answer 8

Movements along the demand curve

Question 9

What do non price factors cause

Answer 9

Shifts on the demand curve

Question 10

A decrease in price results in…

Answer 10

An extension/ expansion in demand =show this via movement along curve

Question 11

An increase in price results in…

Answer 11

A contraction in demand =show this via movement along a demand curve

Question 12

What does the conditions of demand mean?

Answer 12

The numerous factors that will change the demand for a good/service, irrespective of the price level.

Question 13

State the 7 main conditions of demand

Answer 13

Changes in real income
Changes in taste/preferences
Advertising+ branding (successful)
Age structure
Changes in price of substitute goods
Changes in price of complementary goods
Changes in population size/ distribution

Question 14

Substitute goods meaning

Answer 14

Two alternative products that could be used for the same purpose
E.g train + bus journey

Question 15

Complement goods meaning

Answer 15

Products that are used together
E.g petrol + car

Question 16

Changes in real income effect (4)

Answer 16

Real income= income which has been adjusted to inflation
determines how many goods/services can be enjoyed by consumers
If income increases D shifts right D—> D1
Income decreases D shifts left D —> D2

Question 17

Changes in price of substitute goods (4)

Answer 17

Changes in the price of substitute goods will influence the demand for a product/service
There is a direct relationship between the price of good A and demand for good B
Price of good A increases, D for Good B Shifts Right (D→D1)
Price of good A decreases D for Good B Shifts Left (D→D2)

Question 18

Changes in price of complementary goods (4)

Answer 18

Changes in the price of complementary goods will influence the demand for a product/service
There is an inverse relationship between the price of good A and demand for good B
Price of Good A Increases, D for Good B Shifts Left (D→D2)
Price of Good A Decreases, D for Good B Shifts Right (D→D1)

Question 19

What is marginal utility

Answer 19

Marginal utility is the extra utility (satisfaction) gained from the consumption of an additional unit of a product

Question 20

Give an example of marginal utility (burger)

Answer 20

For example, a hungry consumer gains high utility from eating first burger
They are still hungry and purchase a second burger (less satisfaction from eating than they did the first)

Question 21

How do you calculate total utility (2)

Answer 21

To calculate total utility, marginal utility of each unit consumed is added together
This means total utility keeps increasing while marginal utility keeps decreasing

Question 22

What is the law of diminishing marginal utility

Answer 22

The law of diminishing marginal utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit

Question 23

Why is the shape of the demand curve downwards sloping (5)

Answer 23

The law of diminishing marginal utility explains the shape of the demand curve
When the first unit is purchased, utility is high and consumers are willing to pay a higher price
When more units are purchased, each one offers less utility and willingness of the consumer to pay the initial price decreases
Lowering the price makes it a more attractive proposition for consumers to keep consuming additional units
This is one of the reasons why firms offer discounts such as “50% off the second item”

Question 24

ANOUP: The shape of the demand curve

Answer 24

1) Real income effect= As prices decrease from P1-P2, consumers incomes are able to afford more goods + services ie their purchasing power increases
2) Substitution effect= As prices increase of good A, it is likely consumers will switch to a close substitute which becomes relatively cheaper hence demand falls from Q1-Q3

Question 25

ANOUP: Factors causing shifts in demand (7)

Answer 25

Real income= Higher real incomes make goods+ services more affordable hence demand shifts to the right Price of substitutes (competitive demand) = if the price of substitutes goes up, demand for the initial product will also go up as demand will shift from the substitute to the initial product as prices become relatively more attractive. Price of complementary goods (joint demand)= If the price of milk goes up, it is likely the demand for cereal will go down as they are complementary products that are consumed together and at high priced milk will reduce its demand Population= If population increases in rising child births or an increase in immigration, demand will shift to the right Branding + advertising= this helps raise brand awareness and increases brand loyalty making demand more in elastic. This allows firms to charge a higher price while retaining customers for the future Speculative demand= If consumers expect the price or value of something to go up in the near future, demand would likely increase Fashion and tastes= As products become in trend and fashionable, demand can rapidly surge causing prices to increase and vice versa Weather, age, seasonality, gender