Demand

Question 1

Define the law of demand.

Answer 1

The law of demand states that with all things constant, the quantity demanded is inversely proportionate to the price of a product.

1. Price decrease → Quantity demanded increase
2. Price increase → Quantity demand decrease

Question 2

Define the relationship between individual and market demand.

Answer 2

Individual demand refers to a demand curve of a single consumer’s demand for a product.

Market demand refers to an aggregate demand curve of all the individual demand curves.

Question 3

Why does a change in price affect quantity demanded - inversely proportionate? What are the price factors of demand?

Answer 3

1. Substitution effect - price increase of a product (with competition) causes consumers to search for a product more affordable. Therefore demand for this product decreases, and vice versa.
2. Income effect - price increase of a product, purchasing power reduces, and therefore as suggested by the rational self interest, consumers is more likely to purchase less (quantity) of a product.

Question 4

Outline non-price factors that affect demand.

Answer 4

Income
1. Income increase → demand increase (‘normal goods’ - Devondale milk)
2. Income increase → demand decrease (‘inferior goods’ - Woolworths homebrand milk)

Tastes & preferences - over time, culture develops through trends and influences of media.

Price of related products - many markets are interconnected, therefore a change in demand for one product may impact the demand for another product.

Expectations of future price changes - buyers may delay purchases if they are expecting prices to fall (e.g. end of year sale), therefore demand may reduce within the short-term.

Changes in population or demographic - changes in the size and age distribution of a population may affect the demand for particular products (e.g. teens and shoes).