2.2 DEMAND

Question 1

What is demand?

Answer 1

demand is the quantity that buyers are willing and able to buy at a given price over a given period of time

• e.g in a market for consumer goods and services, demand is the quantity of a good or service that consumers are willing and able to buy at a given price over a given period of time
• however in the labour market, demand is the quantity of labour/workers that firms are willing and able to employ at a given wage over a given period of time

Question 2

What is effective demand?

Answer 2

A buyer must be both willing and able to buy at a given price in order to be considered effective demand in a market

Question 3

What is the difference between market and individual demand?

Answer 3

• Individual- Demand of one buyer
• Market Demand - Total demand of all buyers in the market (sum of all individual demand)

Question 4

What is the law of demand?

Answer 4

Law of Demand - The quantity demanded will usually increase as price falls and vice versa assuming all other things are equal (ceteris paribus) - essentially states there is an inverse relationship between price and demand

Question 5

What is competitive demand?

Answer 5

Competitive Demand - Demand for goods that are in competition with each other - e.g train journey between Reading and Twyford with bus and rail - substitutes are in competitive demand

Question 6

What is joint demand?

Answer 6

Joint Demand - goods which are interdependent or demanded together - complements e.g filter coffee and coffee filters

Question 7

What is composite demand?

Answer 7

Composite Demand - demand for a good that has multiple uses which is demanded for several uses - eg gas and flour

Question 8

What is the demand function?

Answer 8

• The demand function shows the mathematical relationship between quantity demanded of a good and various other determinants of demand
• Dn (demand for product) = f(Pn (price of product), Y (income of buyers), Ps (price of substitutes), Pc (price of complements), T (Tastes and Preferences of Buyers), E (Expectations of (future price changes) from buyers), t (time/given period of time)…)

Question 9

What is the demand schedule?

Answer 9

• The demand schedule is a table showing the different total quantities of a good or service buyers are willing and able to purchase at a range of prices over a given period of time
• can be based on individual or market demand

Question 10

What is PED?

Answer 10

• Price Elasticity of Demand measures the responsiveness of quantity demanded of a good or service to changes in price
• PED = (Q2 - Q1/Q1) x100 / (P2 - P1/P1) x100 = %change in quantity demanded/%change in price
• PED is almost always negative due to inverse relationship between demand and price

Question 11

What is the income and wealth effect and how does it mean the demand curve slopes downwards?

Answer 11

• Effect of change of price on quantity demanded arising from a buyer becoming better or worse off as a result of a change in price
• A rise in price of a product means that buyers are now worse off as income+wealth which is unchanged now buys less, which is likely to mean a contraction of demand for the goods and services as consumers will buy fewer goods and services with a set level of income/wealth (if it is a consumer market)
• A fall in price of a product means that buyers are now better off as income+wealth which is unchanged now buys more, which is likely to mean an extension of demand for the goods and services as consumers will buy fewer goods and services with a set level of income/wealth (if it is a consumer market)

Question 12

What is the substitution effect and how does it mean the demand curve slopes downwards?

Answer 12

• The effect of a change of price on quantity demanded arising from a buyer switching to or from a substitute product as a result of a change in price
• A rise in price of a product means buyers are more likely to purchase a substitute product, leading to a contraction of demand for the original product
• A fall in price of a product means buyers are more likely to purchase this product compared to a substitute product, leading to an extension of demand for the original product

Question 13

What is consumer utility and how does it mean the demand curve slopes downwards?

Answer 13

• Consumers as buyers seek to maximise utility - consumers consider the marginal utility per £ spent when making buying decisions
• As the price of a good or service increases, the marginal utility per £ decreases so consumers buy less of a good or service at a higher price as the consumer can gain more utility consuming another good or service (substitution effect) or by not spending (wealth and income effect)
• Diminishing marginal utility is shown by the downward sloping demand curve as a price of a good increases, the quantity demanded falls as the marginal utility per £ spent from consuming the good has fallen

Question 14

What are shifts/increases in demand and what factors affect it?

Answer 14

• increases in demand shift the demand curve to the right
• decreases in demand shift the demand curve to the left
• Factors that shift the demand curve:
  
  • Income
  • Wealth
  • Price of Substitutes
  • Price of Complements
  • Tastes and Preferences
  • Expectations of Future Price changes
  • Time period
  • Demographic and Population
  • Seasonal Changes

Question 15

What is the income elasticity of demand?

Answer 15

• Income Elasticity of Demand
• Income Elasticity of Demand measures responsiveness of quantity demanded of a product relative to change in income
• YED = %change in quantity demanded/%change in income = Q2 - Q1/Q1 / Y2 - Y2/Y1
• YED is negative for inferior goods and positive for normal goods

Question 16

What is a normal good?

Answer 16

• Normal products that have a positive relationship between income and quantity demanded are normal goods
• they also have a positive relationship between changes in income and changes in quantity demanded
• most goods have a positive relationship and are normal
• A fall in income for an normal good or service means a shift to the left in the demand curve or decreased demand

Question 17

What is an inferior good?

Answer 17

• Inferior Goods have a negative relationship between changes in income and changes in quantity demanded
• this is not common, this means as income increases demand for the good or service decreases
• A fall in income for an inferior good or service means a shift to the right in the demand curve or increased demand

Question 18

How do changes in the prices of complements affect demand?

Answer 18

• Demand is influenced by price and availability of substitutes of a product which can be consumed together with the product (complement the product)
• A fall in the price of a complement means a shift in the demand to the right for the product (increase in demand)
• A rise in the price of a complement means a shift in the demand to the left for the product (decrease in demand)
• Complementary Products have a negative cross-price elasticity of demand (XED) - negative relationship between quantity demanded and price of a complementary product

Question 19

How do changes in the prices of substitutes affect demand?

Answer 19

• Demand is influenced by price and availability of substitutes of a product which are considered viable alternatives for the product
• A rise in the price of a substitute means a shift in the demand to the right for the product (increase in demand)
• A fall in the price of a substitute means a shift in the demand to the left for the product (decrease in demand)
• Substitute Products have a positive cross-price elasticity of demand (XED) - positive relationship between quantity demanded and price of alternative product

Question 20

What is XED (cross price elasticity of demand?)

Answer 20

• Cross Price Elasticity of Demand measures the responsiveness of quantity demanded of one product to a change in price of another product
• XED = %change in quantity demanded of good x / %change in price of good y = Q2x - Q1x / Q1x / P2y - P1y/ P1y
• The formula can also be reversed

Question 21

How do tastes and preferences affect demand?

Answer 21

• Individuals and groups of individuals have differing tastes and preferences for specific products which can be influenced by social and emotional factors which can be a result of marketing
• Includes things like population, advertising and seasonal changes

Question 22

What do consumers try and maximise?

Answer 22

We assume consumer rationality which is that consumption choices across all goods and services are made with the aim of maximising total utility (subject to price and income)

Question 23

What is the definition of utility and what is its units?

Answer 23

Utility - the benefit (or satisfaction) a consumer derives from consuming goods and services - measured in the unit utils

Question 24

What is total utility?

Answer 24

Total Utility of a product - the total benefit derived from consumption of all units of a product over a specified time period

Question 25

What is marginal utility?

Answer 25

Marginal Utility -the additional benefit/utility derived from the consumption of an additional unit of a product over a specified time period

Question 26

What is the law of diminishing marginal utility?

Answer 26

Law of Diminishing Marginal Utility - states that as more units of a good are consumed, successive units will bring a smaller addition to total additional than the previous unit (marginal utility decreases not necessarily total utility)