Demand

Question 1

What is a market?

Answer 1

Anywhere where buyers and sellers can exchange goods or services

Question 2

What is demand?

Answer 2

Demand is the quantity of goods and services that consumers are willing and able to buy at a given price and at a particular time

Question 3

What is the law of demand?

Answer 3

As the price increases, the QD decreases

Question 4

What is a a movement along the demand curve?

Answer 4

A contraction or extension in demand, caused only by a change in price

Question 5

What are the reasons that the demand curve slopes downwards?

Answer 5

Income effect - As the price of a product decreases, the real income (income adjusted for inflation) of consumers increases, therefore they have increased purchasing power and can purchase more of the goods/service.

Substitution effect - As the price of a substitute good decreases, it becomes more desirable and attractive compared to similar goods.

law of diminishing marginal utility - As consumption increases, the marginal utility (satisfaction derived from consuming one additional good) decreases, therefore a consumer is willing to pay less for each additional good

Therefore resulting in a downward sloping demand curve

Question 6

What is a shift in demand?

Answer 6

An increase or decrease in the quantity demanded of a good or service at every price and is caused by factors other than price

Question 7

Examples of causes in a shift?

Answer 7

• Equal distribution of wealth can shift the demand curve for luxury products left
• Changes in real incomes (incomes adjusted for inflation)
• Changes in the price of substitutes
• Introduction of new products into a market can affect demand for substitutes
• Changes in derived demand
• Changes in the price of complementary goods in joint demand

Question 8

What are the 3 types of elasticity of demand?

Answer 8

• Price elasticity of demand (PED) : Measures the responsiveness of the quantity demand of a good to a change in price

Equation = % change in demand / % change in price

Elastic demand: % change in price > % change in demand : Values of more than 1 ignoring the minus symbol

Inelastic demand: % change in demand > % change in price : values of between 0 and 1 ignoring the minus symbol

• Income elasticity of demand (YED) : Measures the responsiveness of quantity demanded for a product to a change in income

Equation: % change in quantity demanded / % change in income

For necessity and luxury products, YED is positive (an increase in income leads to an increase in demand)

For inferior products, YED is negative (an increase in income leads to a decrease in demand)

• Cross elasticity of demand (XED) : Measures the percentage change in quantity

Equation: % change in quantity demanded of good A / % change in price good B

Complementary goods will have a negative cross elasticity of demand (as the price increases for a good, the demand for a complementary decreases)