1.2.2 Demand

Question 1

Demand

Answer 1

The ability and willingness to buy a particular good at a given price and at a given moment in time.

Question 2

Movements of demand curve

Answer 2

Caused by a change in price:
Contraction in demand - quantity demanded falls because of an increase in price
Extension in demand - quantity demanded rises because of a decrease in price

Question 3

Shifts of demand curve

Answer 3

Caused by a change in any of the factors which affect demand (conditions of demand)
Decrease in demand (shift left) - fewer goods are demanded at each and every price
Increase in demand (right shift) - more goods are demanded at each and every price

Question 4

The conditions of demand PIRATES L

Answer 4

The conditions of demand are the factors which cause the demand curve to shift. A shift to the right is an increase in demand and a shift to the left is a decrease in demand. One way to remember this is the mnemonic PIRATES L:
Population
Income
Related goods
Advertising
Taste/trend/fashion
Expectations
Seasons
Legislation - government

Question 5

Diminishing marginal utility (why the curve slopes downward)

Answer 5

• The demand curve slopes downward, showing the inverse relationship between price and quantity. This can be explained by the law of diminishing marginal utility.
• In order to explain or predict how people will spend their money, we have to assume that they are going to behave rationally, expecting them to spend it according to what gives them the greatest level of satisfaction or welfare.
• Total utility represents the satisfaction gained by a customer as a result of their overall consumption of a good e.g. the satisfaction of eating the whole bar of chocolate, whilst marginal utility represents the change in satisfaction resulting from the consumption of the next unit of a good e.g. the increased satisfaction by eating another bite of chocolate.

• The Law of Diminishing Marginal Utility states that the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed, assuming the consumption of all other goods remains constant.
• This explains why the demand curve slopes downwards: if more of a good is consumed, there is less satisfaction derived from the good. This means that consumers are less willing to pay high prices at high quantities since they are gaining less satisfaction.

Question 6

.