chapt 3 demand

Question 1

What is the supply and demand model

Answer 1

1. fundamental economic tool for determining prices and guiding resource use.
2. prices influence production, consumption and distribution of goods and services

Question 2

What do prices influence

Answer 2

production
consumption
and distribution of goods and services

Question 3

What is a market

Answer 3

a market is any arrangement that allows buyers and sellers to exchange information and conduct business

• can be physical, virtual, organized or unorganized

Question 4

What is market competition

Answer 4

competitive markets have many buyers and sellers, preventing any single entity form influencing prices

Question 5

Prices in competitive markets reflect what?

Answer 5

the opportunity costs and guide resource allocation

Question 6

What is money price

Answer 6

the dollar amount needed to buy a good

Question 7

What is opportunity cost

Answer 7

the highest-valued alternative forgone when making a purchase

Question 8

What is relative price

Answer 8

the ratio of the money of one good to another, indicating opportunity cost

Question 9

What is demand

Question 10

What does demand consist of

Answer 10

desire, affordability and a plan to purchase

Question 11

What is quantity demanded

Answer 11

the amount consumers plan to buy at a given price, measured per unit of time

Question 12

What is the law of demand

Answer 12

Higher prices lead to lower quantity demanded, and lower prices lead to higher quantity demanded

Question 13

What are the reasons for the law of demand

Answer 13

1. substitution effect
2. income effect

Question 14

what is substitution effect

Answer 14

Higher prices make substitutes more attractive, reducing quantity demanded.

Question 15

What is income effect

Answer 15

Higher prices reduce purchasing power, leading to lower quantity demanded.

Question 16

What is the demand curve

Answer 16

Graph showing the relationship between price and quantity demanded, holding other factors constant.

Question 17

What is the demand schedule

Answer 17

Table listing quantities demanded at various prices.

Question 18

Provide an example of the substitution and Income effect

Answer 18

Energy bars and drinks are substitutes. A price drop in energy bars increases their quantity demanded due to substitution and increased purchasing power (income effect).
A price increase in energy bars decreases their quantity demanded as consumers switch to substitutes and face tighter budgets.

Question 19

How does understanding the principles of demand help us

Answer 19

help us explain and predict market behaviours such as the impact of external shocks (like the banana tree disease) on prices and consumption patterns.

Question 20

With the demand curve, what does down-ward slope indicate

Answer 20

illustrates the law of demand (higher prices lead to lower quantity demanded, and vice versa)

Question 21

How is the demand schedule used

Answer 21

It provides specific data points that can be plotted to create the demand curve

Question 22

What is willingness to pay

Answer 22

the maximum amount a consumer is prepared to spend for a good or service

reflects the value a consumer places on the good

Question 23

How does willingness to pay relate to the demand curve

Answer 23

points on the demand curve indicate consumers’ willingness to pay at various prices

higher points on the curve (left side) - show higher willingness to pay for lower quantities

Lower points on the curve (right side) indicate lower willingness to pay as quantity increases

Question 24

What is the ability to pay

Answer 24

the financial capacity of a consumer to purchase a good or service

depends on the consumers’ income and the price of the good

Question 25

How does ability to pay relate to the demand curve

Answer 25

the demand curve assumes consumers can afford the goods at the given prices

when prices fall - more consumers can afford the good, increasing the quantity demanded

when prices rise - fewer consumers can afford the good, decreasing the quantity demanded

Question 26

Explain the intersection of willingness and ability to pay on the demand curve

Answer 26

demand is a combination of both willingness to pay and ability to pay

consumers purchase a good only if they are both willing and able to pay the price

Question 27

What are the factors that affect willingess or ability to pay

Answer 27

1. changes in income
2. preferences
3. price substitutes

• can shift the demand curve

Question 28

an increase in income generally shifts the demand curve ….

Answer 28

to the right, indicating higher willingness and ability to pay at all prices

Question 29

a decrease in income or higher prices of complementary goods, generally shifts the demand curve ….

Answer 29

can shift the demand curve to the left

Question 30

Demand curve: downward sloping

Answer 30

illustrating that as prices decreases, the quantity demanded increases

Question 31

Each point on the demand curve represents what

Answer 31

a specific price and the corresponding quantity demanded where consumers’ willingness and ability to pay align

Question 32

Willigness and ability to pay is a measure of what

Answer 32

marginal benefit

Question 33

What are the 6 main factors that bring changes in demand

Answer 33

1. the prices of related goods
2. expected future prices
3. income
4. expected future income and credit
5. population
6. preferences

Question 34

Explain substitutes and how they effect demand

Answer 34

substitutes: goods that can be used in place of each other

an increase in the price of one good leads to an increase in the demand for its substitute (ex. price of coffee rise, more tea may be demanded)

Question 35

Explain Complements and how they effect demand

Answer 35

Goods that are used together

An increase in the price of one good leads to a decrease in the demand for it’s compliment

ex. the price for printers rises, the demand for ink (compliment) may decrease

Question 36

Explain expected future prices and how they effect demand

Answer 36

if consumers expect prices to rise in the future, current demand increases as they purchase now to avoid higher future prices

conversely, if consumers expect prices to fall, current demand decreases as they wait for the lower prices

Question 37

Explain normal goods and how they effect demand

Answer 37

goods for which demand increases as income increases

higher income leads to higher demand

ex. luxury cars are a normal good; as people earn more money, they busy more luxury cars

Question 38

Explain inferior goods and how they effect demand

Answer 38

goods for which demand decreases as income increases

higher income leads to lower demand

ex. instant noodles, as income rises, people buy fewer instant noodles and more fresh food

Question 39

Explain future income and credit and how they effect demand

Answer 39

if consumers expect their future income to increase, they may increase their current demand for goods and services

easier access to credit can also boost current demand as consumers are able to borrow to finance their purchases

Question 40

Explain preferences and how they effect demand

Answer 40

changes in consumer tastes and preferences can lead to increase or decreases in demand for certain goods

marketing, cultural trends, health considerations, and technological advancements can influence preferences