4.1.3.1 the determinants of the demand for goods and services

Question 1

what is demand?

Answer 1

the quantity of a good or service which consumers are willing AND able to buy at any possible price in a given period of time

(meaning they have to want it and be able to afford it)

Question 2

what does the law of demand state?

Answer 2

that, ceteris paribus, there is an inverse relationship between quantity demanded and the price of the good or service

Question 3

why is the demand curve downward sloping?

Answer 3

• the demand curve plots the Q of the good/service demanded against its price, and since the relationship between the two is inverse
  -> the demand curve is downward sloping

Question 4

when does the demand curve shift left and right?

Answer 4

LEFT
- when there’s a decrease in the amount demanded at every price

RIGHT
- when there’s an increase in the amount demanded at every price

Question 5

what are the 3 reasons that explain why the demand curve is downward sloping?

Answer 5

1) law of diminishing marginal utility
2) the income effect
3) the substitution effect

Question 6

what is the law of diminishing marginal utility?

Answer 6

the more of a product we consume, the less utility each additional unit consumed provides

Question 7

what is the income effect?

Answer 7

if our income is fixed and the price of a product falls, then we can afford more of it

and vice versa

Question 8

what is the substitution effect?

Answer 8

for goods with substitutes, if price falls, consumers will switch to buying the new relatively cheaper product

and vice versa

Question 9

what are movements along the demand curve caused by?

Answer 9

caused by changes in price

Question 10

what is an extension of demand?

Answer 10

the movement along the demand curve that results in an increase of the quantity demanded

Question 11

what is a contraction of demand?

Answer 11

a movement along the demand curve that results in a decrease in the quantity demanded

Question 12

how do you show a contraction and extension of demand on a diagram?

Answer 12

Question 13

what are shifts in the demand curve caused by?

Answer 13

changes in non-price factors

Question 14

what are the seven non-price factors that cause shifts in the demand curve?
PIRATES

Answer 14

Population
-> more ppl demand more
-> age distribution will effect pattern of demand
Income
-> consumers with higher disposable incomes, demand more
Related goods
Advertising
- increases/decreases D for a good
Trends/fashions
- increases/decreases D for a good
Expectations
- if price increases are expected in the future, they may buy it today
Seasons
-> summer = higher D for sun cream
-> winter = higher D for coats

Question 15

what are substitute goods?

Answer 15

substitute goods replace a good

if the price of a substitute good falls, demand for the original good will decrease (vice-versa)

Question 16

what are complementary goods?

Answer 16

a complementary good goes with another good
eg) tea and milk

if the price of a complementary good falls, demand for the original good will increase (and vice versa)

Question 17

for some goods it’s thought that demand isn’t inversely related to pice and the demand curve slopes upwards instead

what are the 4 goods that this applies to?

Answer 17

1) griffen goods
2) verben goods
3) speculative goods
4) quality goods

Question 18

what are giffen goods?

Answer 18

• demand increases as income deceases and price increases

Question 19

what are verben goods?

Answer 19

snob appeal

Question 20

what are speculative goods?

Answer 20

price decreases = not worth investing in
price increases = worth investing in

Question 21

what are quality goods?

Answer 21

assume if there’s an increase in price, there’s an increase in quality