2.1 - Demand Theory

Question 1

Define demand

Answer 1

Demand is the willingness and ability of consumers to pay a sum of money for a good or service at a given price and at a given point in time.

Question 2

State the law of demand

Answer 2

The law of demand states that there is an inverse relationship between the price of a good and the quantity demanded for it.

Question 3

State the real income effect

Answer 3

As the price of a good falls, the quantity demanded increases because at lower prices, consumers can afford more of a product than at higher prices due to the product being a smaller portion of their income.

Question 4

Substitution effect

Answer 4

As the price of a good falls, the quantity demanded rises partly because the good offers greater satisfaction to the consumer per unit of money spent compared to its substitutes.

Question 5

State the law of diminishing marginal utility

Answer 5

For each extra unit of a good consumed by an individual, the marginal utility they receive from consuming the good falls.

Question 6

Define substitute goods

Answer 6

A substitute for a good is an alternative product that can be used to satisfy a similar want in place of a good.

There is a positive relationship between the price of a substitute and the demand for the good itself.

Question 7

Define complement goods

Answer 7

A complement is a good that can be consumed together with another good.

There is a negative relationship between the price of a complement of a good and the demand for the good itself.

Question 8

List the 3 types of goods

Answer 8

• Normal:
  
  • Necessity
  • Luxury
• Inferior

Question 9

Define normal goods

Answer 9

Normal goods demonstrate a positive relationship between income and demand. As income rises, the demand for normal goods rises.

Most goods are normal goods.

Question 10

Define necessity goods

Answer 10

• A type of normal good.
• They are goods that consumers need to sustain their normal lives.
• As household incomes increase, the demand for necessity goods will increase, but at a less than proportionate rate than the increase in income.

Question 11

Define luxury goods

Answer 11

• A type of normal good
• Strong positive correlation between income and demand
• As household income increases, demand for luxury goods increases at a greater than proportionate rate.
• Goods and services consumers don’t need to sustain their lives.

Question 12

Define inferior goods

Answer 12

• Inferior goods show a negative relationship between income and demand.
• As household incomes rise, the demand for an inferior good falls.
• Often applies to lower priced goods.

Question 13

List the factors that change demand

Answer 13

• Population and demographics
• Consumer taste
• Price expectations

Question 14

Explain how population and demographics changes demand

Answer 14

• Population growth leads to a rise in demand for many goods and services
• Aging population will lead to a rise in healthcare related goods and services

Question 15

Explain how consumer taste changes demand

Answer 15

• A change in consumer taste in favor of a good will lead to a rise in demand.
• Changes overtime due to social and cultural changes.
• Can be influenced through advertising and promotion.

Question 16

Explain how price expectations changes demand

Answer 16

• If consumers believe the price of a good will rise in the future, it will increase in demand.