1.2.2 Demand

Question 1

What is Demand?

Answer 1

How much is demanded at each price over a certain period of time

Question 2

TIP!!!

Answer 2

DO NOT confuse ‘demand’ with ‘wants’:

Wants are desires (may be unaffordable)
Demand is backed up by money

Question 3

What does the Demand Curve demonstrates?

Answer 3

• A fall in price will cause an increase in the quantity demanded (extension in demand)
• A rise in price will cause a decrease in quantity demanded (contraction in demand)

Question 4

What is the Demand Curve based on?

Answer 4

• The substitution effect: when there is a rise in price, the consumer (whose income has remained the same) will tend to buy more of a relatively lower-priced good and less of a higher-priced one
• The income effect: when there is a rise in price, consumers will suffer a fall in their real incomes, i.e. purchasing power of their money incomes. With normal goods, the fall in real incomes will reduce the quantity demanded so the income effect reduces the substitution effect

Question 5

What are the factors that can cause a shift in the Demand Curve?

Answer 5

• Population: an INCREASE in the size of the population will cause an INCREASE in demand for most goods and services. An aging would cause demand for some goods and services to rise
• Real Income: an INCREASE in real incomes implies that incomes (after discounting the effects of inflation) have INCREASED. This would result in an INCREASE in demand for most goods and services, causing a RIGHTWARD shift in the Demand Curve
• Tastes, fashion and preferences: for example, a DECREASE in the popularity of cabbage will cause a LEFTWARD shift in its Demand Curve
• Price of substitutes or compliments: if there is a change in the price of a related goods, it will affect the Demand Curve for the product. For example, if the price of beef rises, then the demand for a substitute such as lamb will INCREASE. In contrast, if there is a rise in the price of petrol (a compliment to cars), then the Demand Curve for cars would shift to the LEFT
• Advertising / Promotion: a successful advertising campaign would cause an INCREASE in demand
• Interest Rates: affect the cost of borrowing money. For example, a rise in interest rates INCREASES the cost off borrowing money for mortgages, so causing a DECREASE in demand for houses

Question 6

What is the concept of diminishing Marginal Utility and its influence of the Demand Curve?

Answer 6

A principle that is based on the idea that consumers gain satisfaction or utility from the goods they consume

Question 7

What is Total Utility?

Answer 7

The amount of satisfaction a person derives from the total amount of a product consumed

Question 8

What is Marginal Utility?

Answer 8

The change in total utility from consuming an extra unit of a product

Question 9

What does the law/principle of diminishing Marginal Utility states?

Answer 9

It states that a consumption of a product is increased, the consumer’s utility increases but at a decreasing or diminishing rate