4.1.3.1 - The Determinants of Demand

Question 1

What is a market?

Answer 1

A voluntary meeting of buyers and sellers in which exchange takes place. Both buyer and seller must be willing to do the exchange.

Question 2

What is a competitive market?

Answer 2

Markets in which large numbers of buyers and sellers possess good market information and can easily enter or leave the market.

Question 3

What is ruling market price?

Answer 3

The price at which planned demand is equal to planned supply. (also known as equilibrium price)

Question 4

What benefit do competitive markets have?

Answer 4

They are highly transparent.

Question 5

How do households have effective demand?

Answer 5

They must sell their labour, the services of any capital or land they own.

Question 6

What does a demand curve show?

Answer 6

The relationship between changing price and demand.

Question 7

How does demand for a good change?

Answer 7

Demand for a good changes depending on the time period.

Question 8

What should the x-axis on a demand curve graph actually say?

Answer 8

Quantity demanded per period of time.

Question 9

What is market demand?

Answer 9

The quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices.

Question 10

What is individual demand?

Answer 10

The quantity of a good or service that a particular consumer or individual is willing and able to buy at different market prices.

Question 11

What is the relationship between market and individual demand?

Answer 11

Market demand is the sum of the demand of all consumers in a market.

Question 12

What is an extension of demand?

Answer 12

The fall in price leading to a rise in demand for a product.

Question 13

What is a contraction of demand?

Answer 13

The rise in price leading to less being demanded.

Question 14

What is assumed when a market demand curve is drawn?

Answer 14

All other variables to influence demand are unchanged. ‘ceteris paribus’

Question 15

What does ceteris paribus mean?

Answer 15

Other things being equal.

Question 16

What is a condition of demand?

Answer 16

A determinant of demand, other than the good’s own price that fixes the position of the demand curve.

Question 17

What are the main conditions for demand?

Answer 17

The prices of substitute goods, the prices of complementary goods, personal income, tastes and preferences, population size (therefore affecting market size).

Question 18

What does a shift to the right of a demand curve show?

Answer 18

An increase in demand.

Question 19

What does a shift to the left of a demand curve show?

Answer 19

A decrease in demand.

Question 20

Why might a rightward shift of a demand curve occur?

Answer 20

An increase in the price of a substitute or a good in competing demand. A fall in the price of a complementary good or good in joint demand. An increase in personal disposable income. A successful advertising campaign. An increase in population size.

Question 21

What is a substitute good?

Answer 21

Alternative goods that could be used for the same purpose.

Question 22

What is a complementary good?

Answer 22

When two goods are complements, they experience joint demand.

Question 23

What is a normal good?

Answer 23

A good for which demand rises as income rises, and demand falls as income falls.

Question 24

What is an inferior good?

Answer 24

A good for which demand falls as income rises, and demand rises as income falls.

Question 25

Must demand curves always slope downward?

Answer 25

No.

Question 26

Why may demand curves not slope downward?

Answer 26

Speculative demand, goods for which consumers use price as an indicator of quality, Veblen goods.

Question 27

Why does speculative demand cause demand curves to not slope downward?

Answer 27

For goods such as stocks, housing etc., as price increases, people may purchase these goods as they predict (speculate) that the good will further increase in price.

Question 28

Why do goods for which consumers use price as an indicator of quality cause demand curves to not slope downward?

Answer 28

If there is a situation of asymmetric information, a buyer may choose to purchase a good that has a higher value because they believe it is of higher quality.

Question 29

Why do Veblen goods cause demand curves to not slope downward?

Answer 29

Some people wish to consume a good such as a Ferrari as a signal of their wealth. As they cost a lot, people buy them. Companies can use advertising campaigns such as Stella Artois that said it was ‘reassuringly expensive’ to drum up sales as it attempted to become a premium brand.