2.1: Demand

Question 1

What is a market

Answer 1

An arena, physical or conceptual where goods and services are traded either through barter or currency

Question 2

Demand

Answer 2

Referring to the willingness and ability of the consumer to buy a product at a particular price in a given time period

Question 3

Price

Answer 3

Amount paid by customer to purchase good or service

Question 4

Law of demand

Answer 4

• Ceteris paribus, the quantity demanded of a good or service will fall as it’s price rises, and vice versa.
• describes the negative relationship between price and quantity demanded

Question 5

Assumptions underlying law of demand

Answer 5

• income effect
• substitution effect
• law of diminishing marginal utility

Question 6

Income effect

Answer 6

Ceteris paribus, as the price of a good or service rises while income is held constant, the consumer can now afford a smaller quantity

Question 7

Substitution effect

Answer 7

Ceteris paribus, as the price of a good rises while a substitute good’s prices remain constant, the rational consumer will likely be incentivized to shift to a cheaper alternative

Question 8

Law of diminishing marginal utility

Answer 8

• The more of a product customers consume, the less they will spend on additional unit.
• eventually the utility will diminish to the point where customers will not want be willing to purchase any more

Question 9

Utility

Answer 9

Usefulness or satisfaction derived from a product by a consumer

Question 10

Demand curve

Answer 10

Illustrates the inverse correlation between price and quantity demanded of a product over a period of time

Question 11

Quantity demanded

Answer 11

The amount of a good or service demanded at a certain price limit

Question 12

Market demand curve

Answer 12

• sum of all individual demand for a product at each price level
• found by adding up individual demand at each price level

Question 13

Non-price determinants of demand

Answer 13

Various factors other than price of the good or service that affect demand and shift the demand curve

Question 14

What are the non-price determinants of demand

Answer 14

R - related products (substitutes and compliments)
I   - income 
P - preferences and tastes 
E - expectations of future prices 
N- number of consumers 

(Acronym RIPEN)

Question 15

Income as a non price determinant of demand

Answer 15

Higher levels of income makes customers more willing and able to buy more products, owing to greater purchase power, Ceteris paribus

Question 16

Normal goods

Answer 16

Products that have a higher demand when real income increases

Question 17

Inferior goods

Answer 17

Products that have a decrease in demand when income rises

Question 18

Tastes and preferences as non price determinants of demand

Answer 18

• products becoming fashionable or trendy = increased demand
• individual emotional preferences

Question 19

Future price expectations as non-price determinants of demand

Answer 19

If consumers expect price to rise in the future, demand will increase in the present. If consumers expect prices to fall in the future, demand at present will decrease.

Question 20

Capital gain

Answer 20

The positive difference between the price paid for an asset and the assets market value

Question 21

Price of related goods as a non price determinant of demand

Answer 21

Sales of one product pacts the demand of another product

Question 22

Complimentary goods

Answer 22

• Products jointly demanded as they go well together.

- A change in price of one product negatively effects the demand of the related good

Question 23

Substitute goods

Answer 23

• products that are in competitive demand and serve as alternatives to one another
• change in price of one has a positivity affect on demand for the other

Question 24

Number of consumers as a non price determinant of demand

Answer 24

If the number of consumers in a market increase, the demand will increase

Question 25

Contraction

Answer 25

Movement along the demand curve caused by price increase

Question 26

Extension

Answer 26

Movement along the demand curve caused by the price falling

Question 27

Assumptions of rational consumer theory

Answer 27

1) all consumers are rational
2) all consumers possess perfect information about all prices, all substitute products, all raw materials and components used, all business practices etc
3) all consumers are driven by the incentive to maximize utility

Question 28

Limitations of rational consumer theory

Answer 28

• biases
• bounded rationality
• bounded self control
• bounded selfishness
• imperfect information