Demand

Question 1

Define the term ‘demand’.

Answer 1

Demand is the amount that consumers are willing and able to pay at each given price point.

Question 2

Define the term ‘effective demand’.

Answer 2

Effective demand is the demand backed by the ability to pay.

Question 3

What is on the x and y axis of a demand curve graph?

Answer 3

The x axis contains the Q(uantity) and the y axis contains the P(rice).

Question 4

What type of correlation does a demand curve have?

Answer 4

Demand curves have a negative correlation.

Question 5

What can we tell from an extension in demand graph?

Answer 5

As the price falls, quantity demanded rises.

Question 6

Define the term ‘extension in demand’.

Answer 6

Extension in demand is when the quantity demanded increases that is caused by falls in price.

Question 7

Define the term ‘contraction in demand’.

Answer 7

Contraction in demand is when falls in quantity demanded that is caused by rises in prices.

Question 8

List the ‘determinants of demand’.

Answer 8

Changes in income | Advertising and publicity | Prices in substitutes | Prices of complementary products | Changes in population | Consumer confidence | Changes in quality | Weather conditions | The law | Uncertainty over future prices | Fashion | Interest rates | Consumer tastes and preferences

Question 9

What do the determinants of demand actually do?

Answer 9

Determinants of demand shifts demand.

Question 10

Define the term ‘complementary product’.

Answer 10

A complementary product are goods that are consumed together.

Question 11

Define the term ‘inferior good’.

Answer 11

An inferior good is when an increase in income leads to a fall in demand.

Question 12

Define the term ‘normal good’.

Answer 12

A normal good is when an increase in income leads to an increase in demand.

Question 13

Define the term ‘composite demand’.

Answer 13

Composite demand is a good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the supply for the other purposes.

Question 14

Define the term ‘derived demand’.

Answer 14

Derived demand is when the demand for one good or service comes from the demand for another good or service. That is, the good is a component of the other good.

Question 15

Define substitution

Answer 15

Substitution is an alternative product.

Question 16

What is PeD - Price Elasticity of Demand?

Answer 16

PeD measures the responsiveness of quantity demanded to a change in the price of the good.

Question 17

What is the formula for PeD?

Answer 17

PeD = Percentage change in Quantity Demanded / Percentage change in Price

Question 18

What does it mean when PeD is between 0 and 1?

Answer 18

This means the good has a price inelastic demand ( i shape). When prices fall, quantity demanded increases but by a smaller proportion than the fall in price. Also, quantity demanded is relatively unresponsive to price changes. Finally, when price falls total revenue will fall.

Question 19

What does it mean when PeD is 0?

Answer 19

The good is perfectly inelastic (Straight line up). When price changes there is no effect on quantity demanded at all. When prices fall, because quantity demanded does not change at all, then total revenue must fall.

Question 20

What does it mean when PeD is infinity?

Answer 20

The good has a perfectly elastic demand (straight line horizontally) . Demand is infinite at a specific price. A change in price would eliminate all demand for the product.

Question 21

What does it mean when PeD is 1?

Answer 21

The good has a unitary price elasticity of demand (curve). A change in price bring about the same proportionate change in quantity demanded. Total revenue will remain the same from a price cut.