Demand

Question 1

What is the definition of demand?

Answer 1

Demand is the quantity of a good or service that consumers are willing and able to purchase in a period of time.

Question 2

What does the Law of Demand state?

Answer 2

The law of demand states that the quantity demanded of a product will fall if price rises, and vice versa, ceteris paribus.

Question 3

What is the income effect (assumption of law of demand)?

Answer 3

As the price of a product falls, real income increases, allowing consumers to buy more, creating more demand.

Question 4

What is the substitution effect (assumption of law of demand)?

Answer 4

As the price of a product falls, it becomes more attractive than substitutes, increasing its demand.

Question 5

What is the law of diminishing marginal utility?

Answer 5

As consumption of a good increases, the extra satisfaction (utility) from each additional unit decreases, so consumers only buy more if the price drops.

Question 6

What is the difference between individual and market demand?

Answer 6

Individual demand is the demand from one consumer.

Market demand is the total demand from all consumers (sum of individual demand).

Question 7

What are the 3 assumptions underlying the law of demand?

Answer 7

The income effect.
The substitution effect.
The law of diminishing marginal utility.

Question 8

Name the 5 non-price determinants of demand (IB syllabus).

Answer 8

Income
Tastes and preferences
Future price expectations
Number of consumers
Prices of related goods

Question 9

What are complementary goods?

Answer 9

Goods used together (e.g. phones and phone cases). If the price of one increases, demand for both decreases.

Question 10

What are substitute goods?

Answer 10

Goods that compete for demand (e.g. iPhones vs. Samsungs). If the price of one rises, demand for the other increases.