Demand

Question 1

Consumer Sovereignty

Answer 1

Consumer demand smore of x –> shortage of x –> price of x rises –> higher profit for producers of x –> existing producers and new firms (they get into that market and produce x) –> consumers want more x: result - more of x is produced. So the cycle repeats.

Question 2

What is demand?

Answer 2

The demand for a commodity is the quantity that will be purchased over a given time at a given price. Effective demand - must be willing to purchase, and able to purchase the commodity.

Question 3

Law of Demand

Answer 3

In microeconomics the law of the demand states that, “conditional on all else being equal, as the price of a good increases, QUANTITY DEMANDED decreases, conversely, as the price of a good decreases, QUANTITY DEMANDED increases”.

In other wrods, there is an inverse relationship between price and quantity demanded of a good.

Ceteris Paribus - “all else being equal”

Always say price before quantity.

QUANTITY DEMANDED VS DEMANDED

Question 4

Why does quantity demanded have an inverse relationship with price?

Answer 4

Demand curves generally have a negative gradient indicating the inverse relationship between quantity demanded and price.

This is due to:

1. the law of diminishing marginal utility
2. the income effect
3. the substitution effect

Question 5

What is diminishing marginal utility?

Answer 5

This law suggests that as more of a product is consumed the marginal (additional) benefit to the consumer falls, hence consumers are prepared to pay less.

• most benefit is generated by the first unit of a good consumed because it satisfies all or a large part of the immediate need or desire
• a second unit consumed would generate less utility - because the consumer as less need or desire
• with less benefit derived the rational consumer is prepared to pay rather less for the second and subsequent, units because marginal utility