2.2 Demand

Question 1

What is demand ?

Answer 1

demand is the willingness and ability of a buyer in a market to purchase a good or service at a given price in a given period of time

Question 2

What is effective demand ?

Answer 2

a buyer must be willing and able to buy at a given price to be considered part of effective demand in a market

Question 3

What is the law of demand ?

Answer 3

• the quantity demanded will usually increase as price falls, and the quantity demanded will usually fall as price increase, ceteris paribus
• it Indicates an inverse relationship between price and quantity demanded

Question 4

What makes up the demand function ?

Answer 4

The demand function indicates the quantity demanded depends on demand conditions:
- price of the product
- income of the buyer
- price of substitute products
- price of compliments
- tastes and preferences of buyers
- expectations of buyers
- all over time

Question 5

What is price elasticity of demand

Answer 5

• Price elasticity of demand (PED) measures the responsiveness of quantity demanded of a good/service to a change in price
• PED = %change in QD/ %change in Price
• PED is almost always negative

Question 6

What is the income (+wealth) effect ?

Answer 6

• income effect - the effect of a change in price on quantity demanded arising from the buyer becoming better or worse off as a result in a change in price
• an increase in price leads to buyers becoming worse off as their income now buys less, this is likely to lead to a contraction in demand
• a decrease in price in price leads to buyers becoming better off as their income buys more leading to an extension in demand

Question 7

What is the substitution effect ?

Answer 7

• the substitution effect is the effect of a change in price on quantity demanded arising from the consumer switching to or from, alternative products as a result of a change in price
• rise In Price leads to consumers being more likely to switch to buying a substitute good, leading to a contraction in demand
• a decrease in price has the opposite effect

Question 8

What do different PED’s look like on the demand curve ?

Answer 8

Question 9

What does a shift in the demand curve show ?

Answer 9

• A shift to the right of the demand curve, shows an increase in quantity demand at any price, as a result of a change of a non-price factor
• A shift to the left of the demand curve, shows a fall in quantity demanded at any price, as a result of a change of a non-price factor

Question 10

What are normal goods ?

Answer 10

• products that have a positive relationship between income and quantity demanded are called normal goods, (QD increases with an increase in income)

Question 11

What are inferior goods ?

Answer 11

• some products have a negative relationship between income and quantity demanded, these are called inferior goods ?
• QD falls with an increase in income, visa versa

Question 12

What is competitive demand ?

Answer 12

competitive demand, demand for goods that are in competition with each-other - substitutes are in competitive demand (bus and rail)

Question 13

What is joint demand ?

Answer 13

joint demand - goods which are interdependent / demanded together

Question 14

What is the law of diminishing marginal utility ?

Answer 14

• the law of diminishing marginal utility states that as more units of a good are consumed, successive units will bring a smaller additional utility