demand

Question 1

what is demand

Answer 1

the amount consumers are willing and able to purchase at any given price over a period of time

Question 2

draw a demand curve and describe

Answer 2

inverse relationship between price and quantity

as price falls the quantity demanded rises and as price rises demand decreases

Question 3

what is effective demand

Answer 3

the willingness and ability of consumers to purchase goods at different prices

Question 4

what is individual demand

Answer 4

Refers to the demand of an individual consumer for a product

Question 5

what is market/total demand

Answer 5

market demand is the sum of all individuals consumers demands for a product e.g. total demand

Question 6

what is the law of demand

Answer 6

the quantity demand willi increase as price falls due to reduced opportunity cost

Question 7

why is the demand curve downward sloping

Answer 7

• income effect: if prices increase consumers willi be able to buy a small number of goods with the income they have
  meaning their real income falls and consumers will react by buying less goods
• substitution effect: as the price of goods increase people are likely to switch and purchase from other business instead
• utility: consumers gain satisfaction from consuming goods. marginal utility is the utility gained from consuming one extra unit of a good.

Question 8

3 types of utility

Answer 8

individual utility: satisfaction derived from the consumption of a good/service
total utility: the entire satisfaction gained from all units consumed
marginal utility: the additional utility derived from the next purchase

Question 9

what is the law of diminishing returns (4)

Answer 9

this law states that as more of a varible factor of production e.g. labour added to a fixed factor of porduction e.g. land then output initially increases but will eventually fall as staff number becomes too large and the fixed factor if overworked

average total costs fall due to increase average returns and rise due to diminishing average returns

marginal costs fall due to increasing marginal returns and rise due to diminishing maginal returns

this applies in the short run time period when one factor of production is fixed. in the long ru there is no fixed costs

Question 10

causes of an upward sloping demand curve (5)

Answer 10

Veblen goods: luxury products who do not follow the usual rules of demand. e.g. Rolex

Giffen goods: necessary goods such as bread. demand will remain the same as price increases

Speculative goods: products bought when prices rise as consumers believe their price willi increase further and so they can be sold later on for more profit

quality goods: a high price suggest greater quality meaning more people may purchase

addictive forming goods:

Question 11

what are the shifts in demand curves called (2)

Answer 11

contractions - decrease in quantity demanded
extensions - increase in the quantity demanded

Question 12

factors that cause a shift in the demand curve (6)

Answer 12

• population: increased population willi increase demand
• advertising: success of promotions will increase demand
• substitutes: if a price of a sub good increases it should increase demand for the alternative good
• complementary goods: a rise in price for a complementary good should reduce demand for the other e.g. joint demand
• income: if income increase demand increases
• changes in fashion: due to trends

Question 13

what is price elasticity of demand

Answer 13

it measures the responsiveness of demand to a change in price. this is how much demand will change following a price movement

Question 14

formula for price elasticity

Answer 14

%change in quantity demanded / %change in price

Question 15

explain elastic demand

Answer 15

the PED value is greater than 1 and states demand will change is price increases or drops

Question 16

inelastic demand explained

Answer 16

its PED value is greater than 0 but less than one and suggests that a change in price willi cause little change to demand

Question 17

factors which determine price elasticity of demand (7)

Answer 17

• the number of substitutes for a good/service: the more substitutes the greater the elasticity as a price change will result in an increase spent on alternative products
• degree of necessity: necessary or addictive items tend to be more price inelastic are are purchased regardless of an increase in price
• luxuries: these tend to be elastic as demand falls when price increases
• habitual and regular consumption goods: tend to be inelastic e.g. bread
• %of income spent: low cost items have price inelasticity e.g. slat
• frequency of purchase: if you can postpone the purchase of a product there is greater elasticity e.g. dishwasher
• time: demand is elastic in the long run rather than short run e.g. increase in electricity price

Question 18

what happens to total revenue when demand is elastic

Answer 18

a price rise will reduce demand and lead to a fall in revenues

a price fall will lead to greater demand and increase sales revenues

Question 19

what happens to total revenue when demand is inelastic

Answer 19

a rise in price leads to a small fall in quantity demanded leading to a an increase in total revenue

a fall in price will lead to a smaller increase in quantity demanded leading to fall in revenue

Question 20

importance of elasticity of demand to firms (5)

Answer 20

• business need to know PED in order to increase or decease their prices to maximise revenue
• it can help business make a marketing plan
• to estimate the effect of change in an indirect tax on price and quantity demanded and whether they can pass the tax to their customers
• PED info can be used for price discrimination
• a firm may plan a promotional discount on price to increase demand

Question 21

importance of elasticity of demand to governments (2)

Answer 21

• governments must know about PED to determine what to tax and whether to increase or decrease tax to bring in more revenue. gov taxes inelastic goods
• PED knowledge could be useful for assessing effect of price support schemes e.g. minimum pricing for agriculture

Question 22

what is joint demand

Answer 22

joint demand refers to the demand for 2 or more products which are

Question 23

what is derived demand

Answer 23

demand for a factor of production which is used to produce another good or service

Question 24

what is competitive demand

Answer 24

when a number of substitutes exist and one good can be purchased instead of another good