Demand (Topic 2)

Question 1

Law of demand

Answer 1

Higher the price of a good, the smaller is the quantity demanded (the other way also)

Question 2

Why are you less likely to buy a good when the price increases

Answer 2

1) Substitution effect
-When the price of a good rises, ceteris paribus, its relative price (compared to the prices of other goods) rises. Ppl buy less of that good and more of its substitutes

2) Income effect
-Ceteris Paribus, when the price of a good rises, it also affects people’s ability to buy (aka real income). As a result, they reduce the amount that they buy of some goods and services

Question 3

5 non price determinants of demand

Answer 3

1) Number of buyers

2) Tastes and preferences

3) Expectations of buyers

4) Income
-Normal good (Direct relationship between changes in income and its demand)
-Inferior good (Inverse relationship between changes in income and its demand)

5) Prices of related goods
-Substitutes in consumption (Pepsi and coke)
-Complements in consumption (Fork and Spoon)