2.2 - Demand

Question 1

What is a market?

Answer 1

A set of arrangements that allows transactions to take place.

Question 2

What is demand?

Answer 2

The quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time.

Question 3

What is Derived Demand?

Answer 3

Demand for a factor of production or good which derives not from the factor or good itself but from the goods it produces.

Question 4

What is Compound Demand?

Answer 4

Demand for a good that has multiple uses.

Question 5

What is Joint Demand?

Answer 5

Demand for goods that are interdependent, such that they are demanded together (complementary goods may be in joint demand).

Question 6

What is Competitive Demand?

Answer 6

Demand for goods which are in competition with each other (substitutes)

Question 7

What two effects are witnessed when the price of a good rises?

Answer 7

Income effect and Substitution effect

Question 8

What is the Substitution effect?

Answer 8

An increase in the price of a good will encourage consumers to buy alternative goods. The substitution effect measures how much the higher price encourages consumers to use other goods, assuming the same level of income.

Question 9

What is the Income effect?

Answer 9

How the price change effects consumer income. If price rises, it effectively cuts disposable income and there will be lower demand.

Question 10

What is an expansion?

Answer 10

Movements along the demand/supply curve resulting in an increase in demand/supply.

Question 11

What is a contraction?

Answer 11

Movements along the demand/supply curve resulting in a decrease in demand/supply.

Question 12

What are the factors that can shift demand?

Answer 12

Population
Advertising
Substitutes
Income
Fashion and trends
Interest rates
Complementary goods

Question 13

What does demand have to be in economics?

Answer 13

Demand has to be effective. Consumers have to be willing and able for demand to exist.

Question 14

What is the law of demand?

Answer 14

There is an inverse relationship between price and quantity demanded. As price increases, Qd decreases and vice versa.

Question 15

What do we assume in the law of demand?

Answer 15

Ceteris Paribus, all other things being equal.

Question 16

What explains the downward slope of the demand curve?

Answer 16

The income effect and the substitution effect.

Question 17

What do non-price factors do the the demand curve?

Answer 17

They shift the demand curve, completely independent of price. Demand either extends or contracts, but importantly at the same price, P1.

Question 18

What is the mnemonic for the factors that shift the demand curve?

Answer 18

PASIFIC

Question 19

What does the P stand for in PASIFIC?

Answer 19

Population. A greater population will increase demand and vice versa.

Question 20

What does the A stand for in PASIFIC?

Answer 20

Advertising. Good advertising can increase willingness to buy a good. Bad advertising, such as a bad report or review, can decrease the demand and willingness to buy the good.

Question 21

What does the S stand for in PASIFIC?

Answer 21

Substitute’s price. If the substitute’s price (Good Y) increases, demand will increase for Good X. Vice versa.

Question 22

What does the I stand for in PASIFIC?

Answer 22

Income. Normal good or inferior good?

Question 23

What is a Normal good?

Answer 23

As incomes rise, demand for normal goods will increase. They can be goods such as cars, designer clothing and fine dining.

Question 24

What is an Inferior good?

Answer 24

As incomes decrease, demand for inferior goods increase. They can be goods such as fast food and holidaying at home.

Question 25

What does the F stand for in PASIFIC?

Answer 25

Fashion/Tastes. Affects willingness to buy. If fashion moves towards the good or service, the demand curve will shift to the right. If fashion moves away from the good or service, the opposite occurs.

Question 26

What does the 2nd I stand for in PASIFIC?

Answer 26

Interest rates. If consumers need to borrow in order to buy the good. Housing, cars and some holidays. If interest rates fall, demand for these goods may rise. If interest rates rise, so it costs more to borrow, the consumers will not demand as many.

Question 27

What does the C stand for in PASIFIC?

Answer 27

Complement’s Price. A complementary good is a good that is often bought with another. If the complement’s price increases, demand may fall causing the demand curve to shift to the left.