Chapter 7 - Demand

Question 1

Define demand.

Answer 1

Demand refers to the willingness and the ability of customers to pay a given price to buy a good or service. The higher the price of a product, the lower its demand tends to be.

Question 2

Define substitutes.

Answer 2

Substitutes are goods or services that can be used instead of each other, e.g. tea or coffee.

Question 3

Define compliments.

Answer 3

Compliments are products that are jointly demanded, e.g. tennis balls and tennis rackets.

Question 4

Define contractions.

Answer 4

A contraction in demand means a fall in the quantity demanded for a product following an increase in its price.

Question 5

Define extension.

Answer 5

An extension in demand means an increase in the quantity demanded for a product following a fall in its price.

Question 6

Define the market demand.

Answer 6

Market demand is the sum of all individual demand for a particular product.

Question 7

What is the law of demand?

Answer 7

As price increases, quantity decreases, ceteris paribus, vice versa.

Question 8

What are the reasons for the relationships between the price of a good or service and the quantity demanded?

Answer 8

1. As the price of a good or service falls, the customer’s real income rises.
2. As the price of a good or service falls, a higher number of customers are able to pay.

Question 9

What are the other determinants of demand other than the price?

Answer 9

• Habits, fashions and tastes
• Income
• substitutes and compliments
• Advertising
• Government policies
• Economy
• Weather
• Population

Question 10

A price raise will cause a __________ in demand for the product.

Answer 10

Contraction

Question 11

A reduction in price will cause an __________ in demand for the product.

Answer 11

Extension