1.2.2 Demand

Question 1

define demand

Answer 1

the quantity of a good or service that consumers are willing and able to purchase at a given price over a given period of time

Question 2

how is demand different to wants

Answer 2

demand is a want backed up by the ability to pay - effective demand

Question 3

what is latent demand

Answer 3

when there is a willingness to buy among people for a good or service, but where consumers lack the purchasing power to be able to afford the product

Question 4

describe the relationship between price and quantity demanded

Answer 4

inverse/negative

Question 5

what assumption is made when deciding the relationship between price and quantity demanded

Answer 5

ceteris paribus

Question 6

what are the two reasons for the relationship between price and demand

Answer 6

income effect and substitution effect

Question 7

explain the income effect

Answer 7

as the price of a product falls, the consumer has more income left (real income has increased) that enables them to buy more of the good

Question 8

explain the substitution effect

Answer 8

as the price of the product falls, consumers switch into the cheaper product away from more expensive substitutes, increasing demand

Question 9

what are the four types of demand

Answer 9

derived demand, joint demand, composite demand, competitive demand

Question 10

explain derived demand, giving an example

Answer 10

demand that arises due to demand for another product e.g demand for cars increases demand for steel

Question 11

explain joint demand, giving an example

Answer 11

demand for goods which are interdependent, such that they are demanded together e.g toothbrushes and toothpaste

Question 12

explain composite demand, giving examples

Answer 12

demand for a good that has multiple uses e.g land, steel, oil

Question 13

explain competitive demand, giving examples

Answer 13

demand for goods that are in competition with each other e.g chocolate, crisps

Question 14

define total utility

Answer 14

represents the satisfaction gained by a consumer as a result of their overall consumption of a good

Question 15

define marginal utility

Answer 15

represents a change in satisfaction resulting from the consumption of the next unit of good

Question 16

what is the law of diminishing utility

Answer 16

as a person consumes more units of a particular good or service while keeping the consumption of other goods constant, the marginal utility gained from each extra unit will decrease

Question 17

explain how the hypothesis of diminishing marginal utility supports a downward sloping demand curve

Answer 17

• consumers generally seek to maximise their overall satisfaction when making consumption choices
• as they consume more, extra satisfaction they gain from each extra unit becomes smaller
• this means they are willing to pay less for each subsequent unit of a good (provides them with less satisfaction) and are willing to buy more of a good when the price is lower because the reduction in price makes each additional unit more valuable in terms of the satisfaction it provides

Question 18

when is total utility maximised

Answer 18

when a consumer consumes the quantity of that product where the marginal utility is zero

Question 19

what will happen if the utility gained from the consumer is greater than the price and why does this support the downwards sloping demand curve

Answer 19

they will keep on consuming, so a rational consumer will keep on consuming until MU=P
therefore the demand curve is downward sloping because at high prices there are fewer situations where MU>P, so there will be less demanded at that price and the opposite is true at lower prices

Question 20

what causes a movement along the demand curve

Answer 20

changes in the market price of the product

Question 21

give the analysis for a contraction in demand

Answer 21

a rise in price from p to p1 is shown by a movement along the demand curve with quantity demanded falling from q to q1 - a contraction in demand

Question 22

give the analysis for an expansion in demand

Answer 22

a fall in price from p to p1 is shown by a movement along the demand curve with quantity demanded rising from q to q1 - an expansion in demand

Question 23

what causes the demand curve to shift

Answer 23

non-price factors

Question 24

what are the non-price factors causing a shift in demand

Answer 24

population
advertising
price of substitutes
incomes/state of the economy
fashion and trends
interest rates and government policies
price of complements

Question 25

explain how population causes a shift in demand

Answer 25

increased population leads to and increase in total demand - outward shift

Question 26

explain how advertising causes a shift in demand

Answer 26

better and more advertising increases awareness of the product and people are more persuaded to buy, leading to an increase in demand - outward shift

Question 27

explain how the price of substitutes causes a shift in demand

Answer 27

an increase in the price of substitutes causes an increase in demand for the original product - outward shift

Question 28

explain how income causes a shift in demand

Answer 28

for a normal good, increased real income increases demand
for an inferior good e.g public transport, value branded goods, an increase in real income decreases demand

Question 29

explain how fashion and trends causes a shift in demand

Answer 29

if it is in fashion then increases demand - outward shift

Question 30

explain how interest rates causes a shift in demand

Answer 30

decreased interest rates increase demand as the cost of borrowing and reward for saving is lower, this is especially true for goods bought on credit e.g car

Question 31

explain how the price of complements causes a shift in demand

Answer 31

a decrease in the price of complements increases demand - outward shift