Demand

Question 1

What is demand

Answer 1

Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

Question 2

What is effective demand

Answer 2

If a consumer is willing to purchase a good, but cannot afford to, it is not effective demand

Question 3

Describe movements along a demand curve

Answer 3

If price is the only factor that changes (ceteris paribus), there will be a change in the QD
This change is shown by a movement along the demand curve

A demand curve showing a contraction in quantity demanded (QD) as prices increase and an extension in quantity demanded (QD) as prices decrease

Question 4

What is the law of demand

Answer 4

The law of demand captures this fundamental relationship between price and QD
It states that there is an inverse relationship between price and QD
When price rises the QD falls
When prices fall the QD rises
This relationship partly explains why the demand curve is downward sloping

Question 5

Factors that could cause shifts in the demand curve

Answer 5

• changes in real income
• changes and tastes/fashion
• advertising and branding
• changes in price of substitute goods
• Changes in the price of complementary goods
  -Changes in population size

Question 6

How does changes in real income cause a shift in demand?

Answer 6

Real Income determines how many goods/services can be enjoyed by consumers
There is a direct relationship between income and demand for normal goods
Income
Increases

D Shifts Right
(D→D1)

Income
Decreases D Shifts Left
(D→D2)

Question 7

How does changes and taste in fashion cause a shift in demand?

Answer 7

If goods/services become more fashionable then demand for them increases
There is a direct relationship between changes in taste/fashion and demand
Good becomes more fashionable

D Shifts Right
(D→D1)
Good becomes less fashionable D Shifts Left
(D→D2)

Question 8

How does advertising and branding cause a shift in demand?

Answer 8

If more money is spent on advertising or branding, then demand for goods/services will increase as more consumers are aware of the product
There is a direct relationship between branding/advertising and demand
Advertising Increases

D Shifts Right
(D→D1)
Advertising Decreases D Shifts Left
(D→D2)

Question 9

How does changes in the price of substitute, goods cause, a shift in demand?

Answer 9

Changes in the price of substitute goods will influence the demand for a product/service
There is a direct relationship between the price of good A and demand for good B
For example, the price of a Sony 60” TV increases so the demand for LG 60” TV increases
Price of Good A Increases

D for Good B Shifts Right
(D→D1)
Price of Good A Decreases

D for Good B Shifts Left
(D→D2)

Question 10

How to changes in the price of complementary good cause a shift in demand

Answer 10

Changes in the price of complementary goods will influence the demand for a product/service
There is an inverse relationship between the price of good A and demand for good B
For example, the price of printer ink increases so the demand for ink printers decreases
Price of Good A Increases

D for Good B Shifts Left
(D→D2)
Price of Good A Decreases

D for Good B Shifts Right
(D→D1)

Question 11

How to change in population cause a shift in demand

Answer 11

If the population size of a country changes over time, then the demand for goods/services will also change
There is a direct relationship between the changes in population size and demand
Demand will also change if there is a change to the age distribution in a country as different ages demand different goods/services e.g an ageing population will buy more hearing aids
Population Increases

D Shifts Right
(D→D1)
Population Decreases D Shifts Left
(D→D2)

Question 12

What is marginal utility?

Answer 12

Marginal utility is the additional utility (satisfaction) gained from the consumption of an additional product

Question 13

Describe marginal utility

Answer 13

The utility gained from consuming the first unit is usually higher than the utility gained from consuming the next unit
For example, a hungry consumer gains high utility from eating their first hamburger. They are still hungry and purchase a second hamburger but gain less satisfaction from eating it than they did from the first hamburger

Question 14

How do you calculate total utility?

Answer 14

To calculate total utility, the marginal utility of each unit consumed is added together
This means that total utility keeps increasing even while marginal utility is decreasing

Question 15

What is the law of diminishing marginal utility?

Answer 15

The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit

Question 16

What does the law of diminishing marginal utility help to explain?

Answer 16

The Law of Diminishing Marginal Utility helps to explain the reason why the demand curve is downward sloping
When the first unit is purchased, the utility is high and consumers are willing to pay a high price
When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases
Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units
This is one reason why firms offer discounts such as ‘50% off the second item’