2.2 Demand

Question 1

What does demand mean?

Answer 1

The quantity buyers are willing and able to buy at a given price over a given period of time

Question 2

What is meant by effective demand?

Answer 2

It is not enough to just simply be willing to buy, or be able to buy. In economics both have to be true for effective demand
Demand is not the same as desire, need or want of a product; buyers must be willing and able to buy

Question 3

What is the law of demand?

Answer 3

The quantity demanded will usually increase as price decreases, and the quantity demanded will usually decrease as price increases (ceteris paribus)
the law of demand suggest there is a inverse relationship between quantity demanded and price

Question 4

What does the demand curve show ?

Answer 4

The demand curve - shows the quantity that buyers are willing and able to buy at any given price in a given period of time

Question 5

Why is the demand curve downward sloping ?

Answer 5

Two main effects:
-income effect - assuming a fixed level of income, the income effect means that as the price falls the amount that consumers are willing and able to buy with their income increases, as the good or service is now a lower proportion of income. This causes demand to increase
-substitute effect - a fall in price of one good or service makes it relatively cheaper than other goods so consumers will increases demand for the cheaper goods and reduce demand for the good which is relatively more expensive.

Question 6

What is an inferior good?

Answer 6

Goods that are demanded less of if real income increases.For example, cheap clothing. this means that a rise in real income will result in the demand curve to shift to the left - people demand less at each price. Consumption will likely switch to more expensive goods instead

Question 7

What is the function of the price mechanism?

Answer 7

1.Signalling function - provides clear information to buyers and sellers of market conditions
2.Incentive function - creates incentives for household and firms to make decisions consistent with meeting objectives based on own self interest
3.Rationing (allocating) function - the price mechanism allocates and rations scarce resources to household and firms who are willing to pay most in pursuit of self interest

Question 8

What is derived demand?

Answer 8

The demand for a good or a factor of production used in making another good or service for example, an increase in the demand for fences would increase the derived demand for wood.

Question 9

What are normal goods?

Answer 9

Those which people demand more of if their real income increases. This means that an increase in real income leads to the demand curve to shift to the right for normal goods.

Question 10

What are substitute goods?

Answer 10

Substitute goods are those which are alternatives of each other - e.g. beef and lamb.
An increase in the price of one good will decrease the demand for it and increase the demand for its substitutes
Also known as competitive demand

Question 11

What are complimentary goods?

Answer 11

Complimentary goods are often used together, so they’re in joint demand e.g. strawberries and cream
If the price of strawberries increases, demand for them will decrease along with demand for cream

Question 12

What is composite demand?

Answer 12

Some goods have more than one use e.g. oil can be used to make plastics or for fuel
-this is composite demand
This means that changes in the demand curve for fuel could lead to changes in the demand curve for plastics

Question 13

How to work out the PED?

Answer 13

To the left of the midpoint of the demand curve the PED is elastic. %∆Qd>%∆P
To the right of the midpoint of the demand curve the PED is inelastic. %∆Qd<%∆P
At the midpoint the elasticity is unit elastic

Question 14

What causes movements along the demand curve ?

Answer 14

Any change in price will result in a movement along the demand curve

Question 15

What are some causes in shifts of demand?

Answer 15

1)wealth
2)price of substitutes
3) seasons, tastes and preference
4) price of complements
5)time period

Question 16

Diagrams illustrating shifts in demand

Answer 16

Increase in demand tells us that consumers are willing and able to buy more at each and every price (shown by a shift to the right)
Decrease in demand tells us that consumers are willing and able to buy less at each and every given price (shown by a shift to the left)