Demand

Question 1

What is Demand?

Answer 1

Demand is when consumers are willing to buy a particular product at a given price.

Question 2

What is Effective Demand?

Answer 2

Effective demand is when demand is backed by willingness to buy and ability to buy.

Question 3

What is Law of Demand?

Answer 3

Law of demand says that when price rises demand goes down and vice versa if all other things remain the same.

Question 4

What does a demand curve look like?

Answer 4

A demand curve always slopes downwards because demand increases with decrease in price.

Question 5

Describe movement of demand curve?

Answer 5

Movement along the demand curve is due to price only while the shift takes place due to non-price determinants.

Question 5

What are the factors that cause shift in demand curve? (non-price determinants)

Answer 5

1. Income level of consumers
2. Advertising
3. Expectations regarding future
4. Population
5. Prices of complementary goods
6. Prices of substitute goods
7. Consumers’ preferences

Question 6

What are complementary goods?

Answer 6

Complementary goods are those which have joint demand.

Question 7

What is Price Elasticity of Demand? (PED)

Answer 7

It refers to the degree of responsiveness of demand to a change in price.

Question 8

What does a perfectly elastic PED look like?

Answer 8

It is a a horizontal line… where the value of PED is infinity.

Question 8

How to calculate PED?

Answer 8

PED = (% change in quantity demanded) / (% change in price)

Question 8

Name the types of PED.

Answer 8

1. Unit elastic : If the value of PED = 1
2. Elastic = If the value of PED > 1
3. Inelastic = If the value of PED < 1
4. Perfectly Elastic = If the value of PED = infinity
5. Perfectly inelastic = If the value of PED = 0

Question 9

Name the determinants of PED.

Answer 9

1. Nature of the product
2. Type of the product
3. Number of substitutes available
4. Time period involved
5. Price of the product
6. Percentage of income spent on the product

Question 10

What does a perfectly inelastic PED look like?

Answer 10

It is a a vertical line… where the value of PED is 0.

Question 11

Is alcohol inelastic or elastic?

Answer 11

Inelastic

Question 11

What is Cross Elasticity of Demand? (XED)

Answer 11

It refers to responsiveness of demand of one product to a change in the price of the other product.

Question 12

Why is PED always negative?

Answer 12

As its graph always slopes downwards.

Question 13

What does XED > 1 and XED < 1?

Answer 13

It means that both products are closely related to each other and vice versa, respectively.

Question 13

How to calculate XED?

Answer 13

XED = (% change in demand for product A) / (% change in price of product B)

Question 14

Name the two types of XED.

Answer 14

1. XED is positive for substitute goods. (it’s graph upward sloping)
2. XED is negative for complementary goods. (its graph is downward sloping)

Question 15

What is Income Elasticity of Demand? (YED)

Answer 15

Income elasticity of demand (YED) refers to the degree of responsiveness of demand to a change in income.

Question 15

When is YED positive? And why?

Answer 15

In case of superior and normal goods such as mobile phone and laptops etc. income elasticity is positive as their demand increases with the increase in income and vice versa.

Question 15

When is YED negative? And why?

Answer 15

In case of inferior goods such as bicycle and economical clothing etc. income elasticity of demand is negative as their demand decreases with the increase in income and vice versa.

Question 15

What are normal goods?

Answer 15

Superior goods, like phone etc, their demand increases with increase in income.

Question 16

How to calculate YED?

Answer 16

YED = (% change in quantity demanded) / (% change in income)

Question 17

What are inferior goods?

Answer 17

Inferior goods are often low-cost replacement goods that are seen as poorer quality. Examples include: bicycle, economic clothing etc.

Question 18

What are some examples of YED = 0?

Answer 18

Toothpaste and salt, as their demand doesn’t change with price.