Economics 2.2

Question 1

demand

Answer 1

Demand indicates the various quantities of a good/service an individual is willing and able to buy at a given price during a given time period

Question 2

Law of demand

Answer 2

The law of demand states that there is a negative relationship between the price of a good and its Qd over a particular time period, CETERIS PARIBUS — as price of a good increases, its Qd decreases, and as price of the good falls, its Qd rises

Question 3

market demand

Answer 3

Sum of all individual demands for a good. The market demand curve illustrates the law of demand, shown by the negative relationship between price and quantity demanded

Question 4

What 3 factors underlie the Law of demand?

Answer 4

1. Law of diminishing marginal utility
2. Income effect
3. The substitution effect

Question 5

Income effect

Answer 5

If the price of a good increases then the real income of consumers decreases and, typically, they will tend to buy less of the good.

Real income refers to income that is adjusted for price changes, and implies the actual buying power of a consumer. As the price of a good decreases, the Qd increases because consumers now have more real income to spend. With more buying power, they sometimes choose to buy more of the same product

Question 6

Substitution effect

Answer 6

When the price of a product falls relative to other product prices, consumers purchase more of the product as it is now relatively less expensive.

Question 7

Law of diminishing marginal utility

Answer 7

This is the idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases.

this law states that as we consume additional units of something, the satisfaction (utility) we derive for each additional unit (marginal unit) grow smaller (diminishes). The law of diminishing marginal utility does NOT state that extra consumption causes a decline in total satisfaction. It merely states that, in this instance, a second or third bag of potato chips will be less satisfying than the first bag. It may still be delicious and add to one’s total level of benefit, but the rate at which it satisficies had dropped form the first to second and third bags.

Question 8

marginal utility

Answer 8

The extra/additional utility derived from consuming one more unit of a good/service

Question 9

market demand

Answer 9

Sum of all individual demands for a good. The market demand curve illustrates the law of demand, shown by the negative relationship between price and quantity demanded

Question 10

non-price determinants of demand

Answer 10

Variables other than price that can influence demand

They cause shifts in the demand curve (shift left or right)

Question 11

WHAT ARE THE NON PRICE DETERMINANTS OF DEMAND

Answer 11

1. income (normal goods)
2. income (inferior goods)
3. tastes/preferences
4. price of related goods
5. number of consumers/potential buyers
6. Expectations of future prices and incomes
7. demographic changes
8. gov. policy
9. seasonal changes

Question 12

factors of production

Answer 12

resources used in the production of goods/services (land, labour, capital and entrepreneurship)

Question 13

joint supply

Answer 13

goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other

Question 14

competitive supply

Answer 14

when goods that a firm is producing use the same resources in their production process. the goods thus compete with each other for the use of the same resources.

Question 15

indirect taxes

Answer 15

taxes on expenditure to buy goods/services

Question 16

subsidies

Answer 16

an amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers

Question 17

price expectations

Answer 17

the forecasts or views that consumers or firms hold about future price movements that play a role in determining demand