1.2 - Demand

Question 1

What causes a shift in the demand curve?

Answer 1

The conditions of demand can cause a demand curve to shift in/left (decrease in demand) or out/right (increase in demand)

Question 2

What causes a movement in the demand curve?

Answer 2

• A change in price causes a movement in the demand curve:
  > Extension in demand
  (quantity demanded
  rises) is caused by a
  decrease in price
  > Contraction in demand
  (quantity demanded
  falls) is caused by an
  increase in price

Question 3

What is demand?

Answer 3

Demand is the ability and willingness of a consumer to purchase a good/service at a particular time.

Question 4

What are the conditions of demand?

Answer 4

• Real income
  > determines how many
  goods/services can be
  purchased by a
  consumers
  > direct rs between
  real income and the
  demand for normal
  goods.
• Taste/Fashion
  > If good/service is more
  fashionable, demand
  increases
• Advertising/Branding
  > More advertising or
  branding, causes
  demand for
  goods/services to
  increase as more
  consumers are aware of
  the product
• Prices of substitute
  goods
  > Changes in the price of
  substitute goods will
  influence the demand
  for a product/service
  > Eg: increase in price of
  good A will cause an
  increase in demand for
  its substitute good B
• Prices of complementary
  goods
  > Changes in the price of
  a good/service will
  influence the demand
  for its complementary
  good/service
  > There is an inverse
  relationship between
  the price of good A and
  demand for good B
• Population
  size/distribution
  > If the population size of
  a country increases
  over time, then the
  demand for
  goods/services will
  increase
  > There is a direct
  relationship between the
  changes in population
  size and demand
  > Demand will also change if there is a change to the age distribution in a country as different ages demand different goods/services
• Government policies
  > If a product becomes a
  legal requirement,
  demand will increase

Question 5

What is marginal utility?

Answer 5

The extra satisfaction gained from the consumption of an extra unit of a product

Question 6

What is the law of diminishing marginal utility?

Answer 6

States that the satisfaction derived from the consumption of an additional unit of a good will decrease as more of the good is consumed

Question 7

How does the law of diminishing marginal utility influence the shape of the demand curve?

Answer 7

• When the first unit is purchased, the utility is high and consumers are willing to pay a higher price
• When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases
• Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units
• This explains why the demand curve slopes downwards