3.1 The Determinants Of the Demand For Goods And Services

Question 1

What is demand?

Answer 1

• Demand is the quantity of a good or service that consumers are able and willing to buy at a given price during a given period of time.
• Demand varies with price.
• Generally, the lower the price, the more affordable the good and so consumer demand increases.
• This can be illustrated with the demand curve.

Question 2

Movements along the demand curve

Answer 2

• Price changes cause movements along the curve
• An extension of demand
• A contraction of demand

Question 3

Factors shifting the demand curve

Answer 3

• Price changes do not shift the demand curve.
• The factors that shift the demand curve can be remembered using the mnemonic PIRATES:

o P- Population
o I- Income
o R- Related goods
o A- Advertising
o T- Tastes and fashions
o E- Expectations
o S- Seasons

Question 4

Shifts in the demand curve-population

Answer 4

• The larger the population, the higher the demand.
• Changing the structure of the population also affects demand, such as the distribution of different age groups.

Question 5

Shifts in the demand curve-Income

Answer 5

• If consumers have more disposable income, they are able to afford more goods, so demand increases.
• A consumer’s wealth affects their demand.
• Consumers generally spend more as they perceive their wealth to increase.
• Likewise, consumers spend less when they believe their wealth will decrease.

Question 6

Shifts in the demand curve-Related goods

Answer 6

• Related goods are substitutes or complements.
• A substitute can replace another good, such as two different brands of TV.
• If the price of the substitute falls, the quantity demanded of the original good will fall because consumers will switch to the cheaper option.
• A complement goes with another good, such as strawberries and cream.
• If the price of strawberries increases, the demand for cream will fall because fewer people will be buying strawberries, and hence fewer people will be buying cream.

Question 7

Shifts in the demand curve-Advertising

Answer 7

• This will increase consumer loyalty to the good and increase demand.

Question 8

Shifts in the demand curve-Tastes and fashions

Answer 8

• The demand curve will also shift if consumer tastes change.
• For example, the demand for physical books might fall, if consumers start preferring to read e-books.

Question 9

Shifts in the demand curve-Expectations

Answer 9

• This is of future price changes.
• If speculators expect the price of shares in a company to increase in the future, demand is likely to increase in the present.

Question 10

Shifts in the demand curve-Seasons

Answer 10

• Demand changes according to the season.
• For example, in the summer, the demand for ice cream and sun lotions increases.

Question 11

The law of demand

Answer 11

• The demand curve is downward sloping, showing the inverse relationship between price and quantity.

Question 12

What is the law of diminishing marginal utility?

Answer 12

• The law of diminishing marginal utility states that as an extra unit of the good is consumed, the marginal utility falls.
• Therefore, consumers are willing to pay less for the good.