micro 2.1- demand

Question 1

define a market

Answer 1

a market is a process through which potential buyers and sellers of goods and services interact to exchange goods and services.

Question 2

what are the two types of market? give an example for each.

Answer 2

visible: food market
invisible: online shopping

Question 3

define demand

Answer 3

Demand is the willingness and ability of consumers to buy goods and services at various prices in a given time period, ceteris paribus.

Question 4

describe a demand graph.

Answer 4

• price on y-axis
• quantity on x-axis
• straight line D (demand) sloping downwards

Question 5

define the law of demand

Answer 5

price and quantity have a negative, or indirect relationship:
- when the price increases you tend to buy less of a good as it becomes more expensive
- when the price decreases you tend to buy more of a good as it becomes more affordable

Question 6

what is the cause of and reason for movement along the demand curve?

Answer 6

when price changes, ceteris paribus, due to the law of demand.

Question 7

when price decreases, there is a(n) ——— along the demand curve.

Answer 7

extension- quantity demanded increases

Question 8

when price increases, there is a(n) ——— along the demand curve.

Answer 8

contraction- quantity demanded decreases

Question 9

what affects the amount by which Qd will change due to a change in price?

Answer 9

the Price Elasticity of Demand (PED) will affect the gradient of the demand curve (greater elasticity= smaller gradient)

Question 10

explain the relationship between an individual consumer’s demand and market demand.

Answer 10

• individual consumer’s demand is a component of market demand
• market demand is the summation of all individual demand of all consumers

Question 11

explain the differences between an individual consumer’s demand and market demand.

Answer 11

• the market demand curve is flatter than the individual demand curve
• individual demand does not always follow the law of demand whereas market demand always does

Question 12

what is the cause of a shift of the demand curve?

Answer 12

changes in non-price determinants (demand determinants)

Question 13

if demand decreases, the demand curve will shift to the ——

Answer 13

left

Question 14

if demand increases, the demand curve will shift to the ——

Answer 14

right

Question 15

state the 5 main non-price determinants of demand

Answer 15

1. income
2. tastes and preferences
3. future price expectations
4. price of related goods (in the cases of substitutes and complements)
5. number of consumers

Question 16

explain income as a demand determinant

Answer 16

for normal goods- as income increases, demand increases (ability increases)
for inferior goods- as income increases, demand decreases (willingness decreases)

Question 17

explain tastes and preferences as a demand determinant

Answer 17

• Possible causes= marketing/branding
• As tastes move towards product, demand increases.

Question 18

Explain future price expectations as a demand determinant

Answer 18

• future prices expected to increase, you will buy more (e.g. houses or stocks) so demand increases
• future prices expected to decrease, you will not buy but will sell so demand decreases

Question 19

explain the price of related goods as a demand determinant

Answer 19

• substitutes- two rival products (eg nike/adidas): when price of one goes up, quantity demanded for it goes down so demand for the other goes up
• complements- two products that go together and are needed for each other, (eg car and fuel): when price of one goes up, quantity demanded for it goes down so demand for the other also goes down

Question 20

explain number of consumers as a demand determinant

Answer 20

more people means demand for most products increases, e.g. food or clothes.

Question 21

state 5 EXTRA demand determinants

Answer 21

• expectation of future incomes
• taxes on income
• changes to age structure of population
• seasonality
• interest rates