A2.01.01: The Law of Demand

Question 1

Define markets

Answer 1

Markets are where buyers and sellers exchange goods and services through economic transactions

Question 2

Examples of 3 markets

Answer 2

• Product market
• Factor market
• Stock market

Question 3

Define demand

Answer 3

The quantity of a good or a service that consumers are willing and able to purchase at various given prices in a certain time period

Question 4

Define effective demand

Answer 4

When a consumer’s desire to buy a product is backed by an ability to pay for it

Question 5

What’s the law of demand

Answer 5

• As price of a product falls, quantity demanded for that product increases (ceteris paribus)

Question 6

Provide 2 reasons the law of demand functions the way it does

Answer 6

• income effect: when price falls, people have an increase in the real income hence, leading to increased purchasing powers and resulting in an increase in quantity of goods and services demanded to increase due to increased discretionary expenditure from higher disposable incomes to spend.
• substitution effect: when people derive more utility after consuming a product, it becomes more attractive to them resulting in substituting it for other products

Question 7

Differences between “Demand” and “Quantity Demanded”

Answer 7

• Demand refers to entire demand curve + an increase=shift
• Quantity Demanded refers to any point along the demand curve