Chapter 2 | Law of Demand

Question 1

Preferences

Answer 1

your wants and their intensities.

Question 2

Demand

Answer 2

consumers’ willingness and ability to pay for a particular product or service.

Question 3

For any choice, what you are willing to pay or give up depends on the cost and availability of substitutes.

Answer 3

For any choice, what you are willing to pay or give up depends on the cost and availability of substitutes.

Question 4

Marginal benefit

Answer 4

the additional benefit from a choice, changing with circumstances.

Marginal benefit explains the diamond/water paradox. Why do diamonds cost more than water, when water is more valuable for survival? Willingness to pay depends on marginal benefit, not total benefit. Because water is abundant, marginal benefit is low. Because diamonds are scarce, marginal benefit is high

Question 5

Quantity demanded

Answer 5

the amount you actually plan to buy at a given price.

Question 6

Market demand

Answer 6

the sum of demands of all individuals willing and able to buy a particular product or service.

Question 7

Law of demand

Answer 7

if the price of a product or service rises, quantity demanded decreases, other things remaining the same.

Question 8

Demand curve

Answer 8

shows the relationship between price and quantity demanded, other things remaining the same.

Question 9

Increase in demand

Answer 9

increase in consumers’ willingness and ability to pay. Rightward shift of demand curve.

Question 10

Decrease in demand

Answer 10

decrease in consumers’ willingness and ability to pay. Leftward shift of demand curve.

Question 11

Demand changes with changes in preferences, prices of related goods, income, expected future price, and number of consumers. For example, demand increases with:

Answer 11

– increase in preferences.
– rise in price of a substitute — products or services used in place of each other to satisfy the same want.
– fall in price of a complement — products or services used together to satisfy the same want.
– increase in income for normal goods — products or services you buy more of when your income increases.
– decrease in income for inferior goods — products or services you buy less of when your income increases.
– rise in expected future prices.
– increase in number of consumers.