3. Demand in Perfectly Competitive Market

Question 1

Law of demand

Answer 1

The law of demand states that a higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded. If two goods are complements, then a decrease in the quantity of one causes a decrease in the demand for the other.

Question 2

Utility

Answer 2

Utility represents the satisfaction that an individual derives from consuming a given good or taking a certain action. It is measured per unit time.

Question 3

Law of Diminishing Marginal Utility

Answer 3

As you consume anything, the satisfaction will decrease from every unit you consume. / The utility from consuming an extra unit of a given good decreases with the number of units that have been previously consumed.

Question 4

Demand / Demand Curve

Answer 4

the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule.

Question 5

Substitution Effect

Answer 5

Demand for the good decreases if the price of the good increases. Because the substitute good is cheaper.

Question 6

Income Effect

Answer 6

Normal Good- decrease in income, decrease in purchaisng power and quantity demanded. Inferior Good— decrease in income, increase in purchasing power and quantity demanded .

Question 7

Price Elasticity of Demand

Answer 7

The price elasticity of demand represents the percentage change in quantity demanded influenced by very small percentage change in price. It measures the responsiveness of the demand to changes in price.

Question 8

Complement

Answer 8

when an increase in the price of one, causes the decrease in quantity demanded of both products because they are same/ complements

Question 9

Substitute

Answer 9

when an increase in the price of one, causes the increase in quantity demanded of the other because the substitute is relatively cheap.

Question 10

Quantity Demanded

Answer 10

The Quantity Demanded by a consumer represents the quantity of a given good or
service that maximizes the utility experienced by the individual consuming it— a certain point on the demand curve or one quantity on the demand schedule— influenced by 5 Shifters

Question 11

Shifters of the demand curve

Answer 11

1. Tastes/ Preferences
2. Number of Consumers e.g. new consumers coming
3. Price of Related Goods e.g. demand will increase for cheaper substitute
4. Income
   - Normal Goods— income and teh demand are directly related
   - Inferior Goods— income and the demand are inversely related
5. Expectations
   - If you expect the price will go up in the future, there’s higher demand in the current state because you want to buy more

Question 12

What are the factors that influence the price elasticity of demand ?

Answer 12

• availability of substitutes
• definition of goods
• income share
• time horizon

Question 13

Utility Maximization Rule

Answer 13

• Firtly calculate the marginal utility
• Then calculate the marginal utility per dollar (MU/ P)
• Then circle the options that has the most MU/P until the dollars are used up
• If to find the reservation price— P , substitute the number in the eqation
• $MU/P1 = MU/P2$