MICRO - LS8 - Demand

Question 1

How can we explain the changes in prices of goods/services

Answer 1

By developing a model that brings together the two fundamental economic agents that determine price of goods- consumers and producers

Question 2

Demand definition

Answer 2

The quantity of a good or service purchased at a given price over a given period of time

Question 3

What does law of demand state

Answer 3

Ceteris Paribus, as price of good increases, quantity demanded decreases
As price of good decreases, quantity demanded increases

Question 4

Decrease in price result

Answer 4

Extension/expansion in demand
- shown by movement on curve

Question 5

Increase in price result

Answer 5

Contraction in demand
- shown by movement on curve

Question 6

Substitute goods

Answer 6

Two alternative products that can be used for the same purpose
E.g. train vs bus - might take bus if train prices increas

Question 7

Complementery goods

Answer 7

Products used together
E.g. tennis racket and ball - if tennis racket price increases then balls brought may decrease

Question 8

Factors that affect demand

Answer 8

- population size (may need services like NHS, care)
- income change, generally increase in income leads to demand rise
- advertising
- change in consumer tastes/preferences
- expectations - if people expect shortage/price increase in future then demand increase and vice versa
- seasons - e.g umbrellas vs ice cream
- gov legislation - demand for car seats increased when gov made it legal requirement
- change in complements/substitues

Question 9

Normal goods

Answer 9

• goods people will demand more if income rises - shift to right

Question 10

Inferior goods

Answer 10

• demand less as income rises

Question 11

More equal distribution of income

Answer 11

Luxury goods demand curve shift to left
Demand curve for other items shift to right

Question 12

When does a movement/shift occur?

Answer 12

• movement - ONLY when prices change
• Shift - when other factors change

Question 13

Why does the demand curve slope downwards

Answer 13

• substitution effect - consumers substitute in favour of the good that becomes relatively cheaper; of the price of good X falls, the demand will increase
• real income effect - if the price of good X falls, the consumer buying good X will gain more purchasing power, this extra ‘income’ available for spending can be used to buy more X