2.1 Demand

Question 1

What is demand

Answer 1

The quantity of goods and services consumers are willing to and able to purchase at various prices during a specific time period, ceteris paribus.

Question 2

Law of demand

Answer 2

Negative relationship between the price of a good and its quantity demanded over a particular demand. meaning that if price increases then quantity will decrease as consumers will be willing and able to buy less per period

E.x if price increases, quantity demanded decreases

Question 3

Competition occurs when

Answer 3

there is a large number of buyers and sellers acting independently. An individual seller has very little, or no, market power to influence the price of the product.

Question 4

income effect

Answer 4

When the price of a product falls, and if consumers’ incomes have not changed (which means that they have the same amount of money to spend), we assume that consumers can buy more of that good. This means that their real income in terms of this good has increased, and therefore they can demand a larger quantity of it.

Question 5

substitution effect

Answer 5

if the price of a good rises, the good now costs more than alternative or substitute goods. all other good automatically become cheaper so people switch to these substitutes. this explains why following an increase in price, quantity demanded decreases

Question 6

Marginal utility

Answer 6

the benefit gained from consuming one additional unit of a product or service

Question 7

The law of diminishing marginal utility

Answer 7

states that as people consume additional units of a good or service, the marginal utility declines. Consumers get less and less satisfaction from each additional unit.

Question 8

What is utility

Answer 8

The satisfaction consumers gain from consuming something

Question 9

Whenever the price of a good changes, ceteris paribus, it leads to a

Answer 9

movement along the demand curve of that good

Question 10

A change in any other factor that is not the price of the good itself is called a

Answer 10

on-price determinant and will result in a shift of the entire demand curve

Question 11

What causes a movement along the demand curve?

Answer 11

Changes in price

Question 12

What causes a shift of the demand curve

Answer 12

non-price determinants

Question 13

Non-price determinants of demand

Answer 13

income of normal/inferior goods
preferences and tastes
Price of substitute goods
Price of complementary goods
number of consumers
expectation for future price changes

Question 14

Explain the non-price determinant of income

Answer 14

Income of normal good - when incomes increase, so does demand

Income of inferior good- when income increases, demand falls

Question 15

Explain the non-price determinant of preferences/tastes

Answer 15

If preferences change in favor of a product, demand will increase

Question 16

Explain the non-price determinant of substitute goods

Answer 16

Two goods are substitute goods if they satisfy a similar need

If price of good A increases, demand for good B will increase, as it is cheaper to purchase

Question 17

Explain the non-price determinant of complementary goods

Answer 17

Two goods that are used together

In good A experiences a fall in price, then good B’s demand will increase.

Question 18

Explain the non-price determinant of number of consumers

Answer 18

If there is more consumers, there will be more demand

Question 19

Normal goods

Answer 19

goods whose demand increases as people’s incomes increase

Question 20

Inferior goods

Answer 20

goods whose demand decreases as people’s income increases. These types of goods tend to be lower-quality, less expensive goods, which people use as substitutes for higher-priced equivalents when their income falls.