2.2 Demand

Question 1

How is the price of a good determined?

Answer 1

determined by the interactions of many sellers and buyers, through the forces of demand and supply

Question 2

Define ‘demand’

Answer 2

the various quantities of a good or service a consumer is willing and able to pay at a given price within a given time period, ceteris paribus

Question 3

Define ‘ceteris paribus’

Answer 3

all things other than price (which can affect how much the consumer is willing and able to pay) are kept constant

Question 4

What is the law of demand?

Answer 4

there is a negative relationship between price and quantity demanded over a particular time period, ceteris paribus:

• as the price of a good increases, quantity demanded decreases, ceteris paribus
• as the price of a good decreases, quantity demanded increases, ceteris paribus

Question 5

Define ‘market demand’

Answer 5

the sum of all individual demands for a good which is presented on a demand curve

Question 6

What are non-price determinants of demand?

Answer 6

variables other than price that can influence demand

Question 7

What is a rightward shift called and what does it suggest?

Answer 7

indicates that more is demanded at the same given price = increase in demand

Question 8

what is a leftward shift called and what does it suggest?

Answer 8

indicates that less is demanded at the same given price = decrease in demand

Question 9

Describe ‘Income (normal goods)’ as a determinant

Answer 9

consumer income increases =
demand increases for normal goods
(rightwards shift + shortage)

consumer income decreases =
demand decreases for normal goods
(leftwards shift + surplus)

Question 10

Describe ‘Income (inferior goods)’ as a determinant

Answer 10

consumer income increases =
demand decreases for inferior goods
(leftwards shift + surplus)
- will buy more expensive alternatives/luxury goods

consumer income decreases =
demand increases for inferior goods
(rightwards shift + shortage)
- second hand cars and clothes

Question 11

Describe ‘tastes and preferences’ as a determinant

Answer 11

good become popular/preferred =
demand increases
(rightwards shift + shortage)

good becomes less popular/less preferred =
demand decreases
(leftwards shift + surplus)

Question 12

Describe ‘future price expectations’ as a determinant

Answer 12

if they think the price will increase in the future
demand increases now
(rightwards shift + shortage)

if they think the price will decrease in the future
demand decreases now
(leftwards shift + surplus)

Question 13

Describe ‘substitues’ as a determinant

Answer 13

if the price of good X increases, the demand for Y increases
if the price of good X decreases, the demand for Y decreases

if the price of Y increases, the demand for X increases
if the price of Y decreases, the demand for X decreases

Question 14

Describe ‘complementary goods’ as a determinant

Answer 14

if the price of good X increases, the demand for Y decreases
if the price of good X decreases, the demand for Y increases

if the price of good Y increases, the demand for X decreases
If the price of good Y decreases, the demand for X increases

Question 15

Describe ‘number of consumers’ as a determinant

Answer 15

increase in number of consumers = increase in demand
decrease in number of consumers = decrease in demand

Question 16

What is a movement along a curve and when does it occur?

Answer 16

a change in price = change in (quantity) demanded which is shown as a movement on the demand curve

Question 17

What is a shift along a curve and when does it occur?

Answer 17

a change in a non-price determinant = change in (demand) which is shown by a shift of the entire curve

Question 18

define ‘total utility’

Answer 18

the total satisfaction that consumers get from consuming something

Question 19

Define ‘marginal utility’

Answer 19

the extra satisfaction that consumers receive from consuming one more unit of a good

Question 20

What happens to total utility and marginal utility as you continue to consume more of a good

Answer 20

as consumption of a good increases, total utility increases, however, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed.

Question 21

why does ‘marginal utility’ decreases

Answer 21

the satisfaction that consumers get from consuming more and more units of a good decreases

Question 22

How does the law of diminishing marginal utility relate to the law of demand

Answer 22

since consumers derive less and less utility from each extra unit of a good, they will only buy additional units when the price of the good falls. This is to maximise the total utility they derive.

Question 23

What is the income effect and how it relates to the law of demand

Answer 23

a fall in price = increase in real disposable income and consumer’s purchasing power, leading to an increase in quantity demanded

an increase in price = decrease in real disposable income and consumer’s purchasing power, leading to a decrease in quantity demanded

Question 24

What is the substitution effect and how it relates to the law of demand

Answer 24

a fall in price = consumers will buy more and quantity demanded increases for this substitute