1.2 Market Demand

Question 1

What is the income effect?

Answer 1

It represents the change in an people’s income and shows how this impacts the quantity demanded of a good or service

Question 2

What is the relationship between income and quantity demanded?

Answer 2

Positive because as income increases, so does the quantity of goods and services demanded.

Question 3

What is the substitution effect?

Answer 3

When the price of a good falls, it’s cheaper than another substitute, so consumers may switch leading to higher demand if it is a close substitute

Question 4

What causes the demand curve to shift?

Answer 4

1) Changing prices to substitute good (in competition)
2) Changing prices to complimentary goods (joint demand)
3) Changes of income of consumers
4) advertising and marketing
5) interest rates

Question 5

What is marginal utility?

Answer 5

Change of satisfaction from consuming an extra unit

Question 6

What is diminishing marginal utility?

Answer 6

When marginal utility starts to fall so consumers will only be prepared to pay a lower price

Question 7

What is derived demand?

Answer 7

Demand for a factor of production used to make another good or service

Question 8

What is Composite demand?

Answer 8

When goods have more than one use.

Eg) milk, land and oil