Price determination in a competitive market

Question 1

What is demand?

Answer 1

The quantity of a good or service consumers are willing and able to buy at a given price in a given time period.

Question 2

What is the law of demand

Answer 2

There is an inverse relationship between price and quantity demanded.

Question 3

Why is there a downward slope in the demand curve?

Answer 3

Income effect and substitution effect

Question 4

How does the income effect explain the downward slope of the demand curve?

Answer 4

As the price of a good decreases, consumers can afford to buy more with their income, leading to an increase in quantity demanded. Conversely, if the price rises, their real income decreases, reducing quantity demanded.

Question 5

How does the substitution effect explain the downward slope of the demand curve?

Answer 5

When the price of a good falls, it becomes cheaper relative to substitute goods, causing consumers to buy more of it instead of alternatives, thereby increasing quantity demanded. If the price rises, consumers will switch to cheaper substitutes, decreasing quantity demanded.

Question 6

what does PASIFIC mean?

Answer 6

Factors shifting demand: Population, Advertising, Substitute price, Income, Fashion/tastes, Interest rates, Complements price

Question 7

7 Factors affecting demand?

Answer 7

Population, Advertising, Substitute price, Income, Fashion/tastes, Interest rates, Complements price