1.2.2 Demand

Question 1

Define demand

Answer 1

The quantity that purchasers are willing and able to buy at a given price in a given period of time

Question 2

Basic Law of demand

Answer 2

. Demand varies inversely with price lower prices means higher demand

Question 3

Define extension of demand

(Movement along demand curve)

Answer 3

. It’s when quantity demanded increases

. Caused by decreased price

Question 4

Define contraction of demand

(Movement along demand curve)

Answer 4

. It’s when quantity demanded decreases

. Caused by increased prices

Question 5

What factors causes shift in the demand curve? (They are called the conditions of demand)

Answer 5

. Advertising - If there is advertising for a good or service at the same price, more people will be willing to consume it shifting demand to the right from D1 to D2

. Population - An increase in population due to net immigration for example will increase the willingness and ability of consumer to buy goods and services, increasing demand to the right from D1 to D2

. Price of complementary goods (causes joint demand)

. Price of substitutes (causes competitive demand) - If the price of substitute good or service increase, the competitiveness of the good where price remained the same increases. Therefore, the willingness and ability to consume the good increases, shifting demand curve to the right

. Income of consumers

. Interest rates

. Expectations of future price increases

Question 6

What factor causes movement along the demand curve?

Answer 6

Changing prices

Question 7

When does shift in the demand curve occur?

Answer 7

. Due to the conditions of demand

. Price level stays the same, but change in conditions cause a shift in demand

Question 8

What are the conditions of demand?

Answer 8

Factors that cause a shift in the demand curve

Question 9

Name three reasons for the negative slope of the demand curve

Answer 9

. Income effect

. Substitution effect

. Diminishing Marginal utility

Question 10

Explain substitution effect

(Reason for a Negative slope)

Answer 10

When the price of the product X falls in comparison to Y, (ceteris paribus, e.g. quality remains the same) then people may switch from buying an expensive good to the cheaper one.

Question 11

Explain income effect

(Reason for a Negative slope)

Answer 11

If the price of a product falls, you can buy more with a set amount of money. There is more disposable income

Purchasing power is greater when price falls

Question 12

Define normal goods

Answer 12

Demand for these good increases when income rises

Question 13

Define inferior goods

Answer 13

Demand for these goods fall when income rises

Often characterised by low quality, with better alternatives

e.g. Tinned meat or corned beef as they are cheap forms of meat which poor people on low income often buy

Question 14

Define utility

Answer 14

A measure of satisfaction that we get from purchasing and consuming a good or service

Question 15

Define total utility

Answer 15

The total satisfaction from a given unit of consumption

Question 16

Define marginal utility

Answer 16

The change in satisfaction from consuming an extra unit of a good or service

Question 17

Explain diminishing marginal utility

(Reason for a Negative slope)

Answer 17

Beyond a certain point, marginal utility start to diminish (fall ) e.g. after 10 biscuits

. A demand curve shows that the more units that buyers are offered, the less value they put on the last one bought. In other words, the higher the quantity the cheaper the price due to a diminishing marginal utility.

Question 18

Define derived demand

Answer 18

. Where there is a demand for good or factor of production resulting from demand from an intermediate good or service

e. g. land is a derived demand from goods and services
e. g labour is a derived demand from the demand for goods and services and workforces as workforces need employees to keep up with high demand

Question 19

Define composite demand

Answer 19

Exists where goods have more than once use - an increase in demand for one product lead to fall in supply of the other

e. g. milk can be used for cheese, yoghurt and butter
e. g. land can be used for houses, farming and school

Question 20

Name two types of Shift for Demand

Answer 20

. Inward shift — shift to the left meaning less is demanded

. Outward shift — shift to the right meaning more is demanded

Question 21

Define marginal

Answer 21

next one / one more

Question 22

Define negative marginal utility

Answer 22

. Where if the consumption of a commodity is carried to excess, then instead of giving any satisfaction, it may cause dis - satisfaction

Question 23

Explain Paradox of Value

Answer 23

. Examines why goods that are not essential to life can command a much higher price than goods that are essential to life

. Classic example is water and diamonds. Water is essential yet cheap, but diamonds are not essential yet expensive

Question 24

Define + Explain Veblen and Giffen goods

Answer 24

Veblen Goods — Has an upward sloping demand curve instead. It means that as demand increases, price increases. It is a high quality product and often a a status symbol. It’s purpose if for conspicuous consumption. e.g. designer

Giffen Goods — Also has an upward sloping demand curve meaning that as demand increases, price increase. The increase in demand is due to the income effect of the higher price outweighing the substitution effect. However, it a non - luxury item, but is a necessity with little to none substitutes. E.g. Rice, Bread, wheat

Question 25

Name two types of Demand

Answer 25

. Composite Demand

. Derived Demand

Question 26

Define Conspicuous consumption

Answer 26

. The purchase of goods and services for displaying one’s wealth and class and status.

Question 27

Define Zero Marginal Utility

Answer 27

When consuming more of an item brings no extra satisfaction