CH8 Demand

Question 1

What is demand?

Answer 1

it is the quantity of goods or services that will be bought at any given price over a period of time

Question 2

When is there a movement along the demand curve?

Answer 2

when price changes

Question 3

When is there an extension of demand?

Answer 3

When the quantity demanded rises

Question 4

When is there a contraction of demand?

Answer 4

When the quantity demanded falls

Question 5

What is important to remember about what the demand curve shows?

Answer 5

it is important to remember that the demand curve shows effective demand. It shows how much would be bought at any given price and NOT how much buyers would like to buy if they had unlimited resources

Question 6

What is the mathematical relationship between demand and price?

Answer 6

it an inverse proportional relationship between price and quantity demanded. So as prices rise the quantity demanded falls

Question 7

What is meant by the conditions of demand?

Answer 7

the other factors apart from price which can cause demand for a product to change

Question 8

What do changes in the conditions of demand cause?

Answer 8

they cause a shift in the demand curve either to the right or the left

Question 9

What happens to the demand of a normal good when income rises?

Answer 9

demand for a normal good rises (clothes)

Question 10

Which goods fall in demand when income rises?

Answer 10

inferior goods

Question 11

What direction does the demand curve shift if there is an increase in demand?

Answer 11

shifts to the right

Question 12

What direction does the demand curve shift if there is a decrease in demand?

Answer 12

shifts to the left

Question 13

What are some important factors that influence demand?

Answer 13

-income
-prices of other goods (substitute goods and complementary goods)
-changes in populations: an increase in population is likely to increase demand for goods
-changes in fashion: the demand for items such as wigs or flared trousers or white kitchen units changes as these items go in or out of fashion
-changes in legislation: the demand for seat belts, anti-pollution equipment or cigarettes has been affected in the past by changes in government legislations
-advertising: a very powerful influence on consumer demand that seeks to influence consumer choice

Question 14

What is another way of putting as the price falls, so buyers want to buy more?

Answer 14

the more buyers are offered, the less value they put on the last one bought

Question 15

What is meant by the law of diminishing marginal utility?

Answer 15

the value, or utility, attached to consuming the last product bought falls as more units are consumed over a given period of time

Question 16

Give an example of this law (student movie example)

Answer 16

a student might be prepared to pay £5 to watch a film on Saturday. The student might be prepared to watch a second film that day, but values the second film less than the first.
-Eventually, the student would begin to experience negative marginal utility and would pay not to have watch yet another film.

Question 17

What was Adam Smith puzzled about?

Answer 17

He was puzzled why consumers paid a high price for goods such as diamonds, which were unnecessary to human existence, whilst the price of necessities such as water was very low. This problem is known as the Paradox of value

Question 18

Can the law of diminishing marginal utility explain the paradox of value?

Answer 18

yes.
-if there are few goods available to buy, as with diamonds, then consumers are prepared to pay a high price for them because their marginal utility is high. If goods are plentiful, then consumers are only prepared to pay a low price because the last one consumed has low marginal utility.

Question 19

What does the law of diminishing marginal utility therefore explain about the demand curve?

Answer 19

it explains why the demand curve slopes downwards. The higher the quantity bought, the lower the marginal utility (the utility from the last one) derived from consuming the product.

Question 20

What is meant by consumer surplus?

Answer 20

this is the difference between the value to buyers and what they actually pay