7- Demand

Question 1

Demand definition

Answer 1

Demand is the quantity of good and services that will be bought at any given price over a period of time.

Question 2

What is the Law of Demand?

Answer 2

Assuming ceteris paribus, there is an inverse relationship between price and quantity demanded.

Question 3

Demand curve

Answer 3

Is almost always downward sloping due to the law of demand and it represents the law of diminishing marginal utility.

Question 4

Price

Answer 4

What the buyer pays for a specific good or service

Question 5

Quantity

Answer 5

The total number of units purchased at that price.

Question 6

Contraction of demand

Answer 6

A move up the demand curve. As price increases demand decreases.

Question 7

Extension of demand

Answer 7

A move down the demand curve. As price falls demand increases.

Question 8

What are the conditions of demand?

Answer 8

Factors other than price which lead to a change in demand:

• Population
• Advertising
• Substitutes
• Income
• Fashion
• Interest rates
• Complements

Question 9

What do a change in the conditions of demand cause?

Answer 9

A shift to the supply curve. Right if there is an increase and left if there is a decrease.

Question 10

The 2 theories that explain the law of demand?

Answer 10

• Income effect: when prices fall, consumer can afford a greater quantity of goods and services (assuming income is fixed). So demand for those goods and services increase.
• Substitution effect- when the price of one good falls, consumer will buy more of the cheaper alternative good or service. So demand for a cheaper good will increase and demand for the costlier good. Positive relationship

Question 11

What is a Normal Good?

Answer 11

Increase in income, leads to an increase in quantity demanded e.g a new car , designer clothes

Question 12

What is an Inferior Good?

Answer 12

Increase in income leads to a reduction in quantity demanded e.g public transport, fast food

Question 13

Consumer Surplus definition

Answer 13

The difference between the price consumers are willing and able to pay compared to what they actually pay.

Question 14

Where is consumer surplus found?

Answer 14

Above the price line but below the demand curve.

Question 15

Why does demand change when the price changes?

Answer 15

• Effective demand (willing and able to buy)
• Budget constraint (unable to pay)
• Maximization of utility

Question 16

Quantity demanded equation

Answer 16

Quantity demanded= function(price, income, price of other goods/services, consumer tastes, all other factors)

The quantity demanded is said to be a function of (depends upon) all the above factors.

Question 17

What is a Veblen Good?

Answer 17

A special type of good identified by Veblen. He identified the ‘snob’ effect where people paid more for certain products as their price increased. Veblen believed it was due to the increased status that buying higher priced goods come with.