Micro: Market Demand

Question 1

What is demand?

Answer 1

-Demand for a good or service is the quantity that purchasers are willing and able to buy at a given price in a given period of time?

Question 2

What is effective demand?

Answer 2

-Only if demand for a product is backed up by a willing and ability to pay the market price does demand become effective or realized.

Question 3

What is the basic law of demand?

Answer 3

• Demand varies inversely with price.
• When price goes up, quantity demanded goes down.
• When price goes down, quantity demanded goes up.

Question 4

What are the conclusions of a demand curve?

Answer 4

• Only changes in market price causes a movement along the demand curve.
• A higher price leads to a contraction of quantity demanded.
• A lower price leads to an expansion of quantity demanded.

Question 5

What are income and substitution effects of a price change?

Answer 5

Income effects:
-Fall in price increases real purchasing power of consumers. Allows people to buy more with given budget. For normal goods, demand rises when there’s an increase in real income.
Substitution effects:
-Fall in price of good X makes it relatively cheaper compared to substitutes. Some consumers will switch to good X leading to higher demand. Much depends on whether products are close substitutes.

Question 6

What are the cause of shifts in the demand curve?

Answer 6

• Changing prices of a substitute goods or services in competitive demand.
• Changing prices of a complement, products in joint demand.
• Changes in real income of consumers:
• When real income goes up, our ability to purchase goods and services increases, causing an outwards shift in demand curve.
• But when incomes fall there will be a decrease in demand, except for inferior goods.
• Changes in distribution of income, more equal distribution of income will increase total demand because relatively poorer consumers spend higher proportion of their income.
• Effects of advertising and marketing
• Interest rates + demand
• Changes in size + age structure of pop.
• Seasonal factors for some goods and services.
• Social and emotional factors.

Question 7

What are the illustrations of shifts in the demand curve.

Answer 7

• Changes in price do not cause shifts in the demand curve for a product.
• Diagonal lines going from left to right (D3, D1, D2).
• D1 to D3 is an inward shift of demand, less is demanded at each market price.
• D1 to D2 is an outward shift of demand, more is demanded at each market price.