Theory of demand

Question 1

Define demand

Answer 1

• willingness and ability (purchasing power)
• to buy particular good
• per period of time
• a.k.a Effective demand

Question 2

Define quantity demanded

Answer 2

• specific amt of good & price
• consumers willing and able to buy
• over period of time

Question 3

Law of demand

Answer 3

• inverse relationship
• higher price of good
• lower quantity demanded of the good
• ceteris paribus

Question 4

2 reasons for the inverse relationship (Law of demand)

Answer 4

1. Income effect

2. Substitute effect

Question 5

Income effect

Answer 5

• when price rise
• income remains same
• feel poorer, cannot afford to buy as much
• quantity demanded falls

Question 6

Substitute effect

Answer 6

• when price rise
• ppl switch to cheaper alternatives
• quantity demanded falls

Question 7

2 ways to illustrate law of demand

Answer 7

1. Demand schedule

2. Demand curve (downsloping)

Question 8

Individual demand schedule

Answer 8

• amt of a good a consumer (*) are able and willing to buy
• specific price
• over a period of time

Question 9

Market demand schedule

Answer 9

• aggregate of all individual schedules for a good
• obtained by horizontal summation
• shows total quantity of a good demanded
• by all consumers @ specific price, ceteris paribus

Question 10

Changes in quantity demanded

Answer 10

• change in amt of good
• ppl willing and able to buy
• due to change in price of good
• increase/decrease lead to movement along curve

Question 11

Change in demand

Answer 11

• change in non-price determinants

- increase/decrease lead to shift in graph

Question 12

Non-price determinants (NPD)

Answer 12

1. Income
2. Price of related goods
3. Consumers’ expectations
4. Taste and preferences
5. Population size and demographic structure

Question 13

Income (NPD)

Answer 13

• effect of a change in income depends on type of good

- normal good vs inferior good

Question 14

Normal good (income)

Answer 14

• demand varies positively with income
• income rise, demand for normal good rises
• e.g. smartphones, restaurant food

Question 15

Inferior good (income)

Answer 15

• demand varies inversely with income
• income rise, demand for inferior good falls
• e.g. basic features smartphones, instant cup noodles

Question 16

Price of related good (NPD)

Answer 16

• substitutes

- complements

Question 17

Substitutes (Price of related good)

Answer 17

• competitive goods
• satisfy the same want
• e.g. Adidas & NIke Shoes
• an increase in price of one leads to an increase in demand for the other

Question 18

Complements (Price of related goods)

Answer 18

• joint demand, bought tgt to satisfy a particular want
• e.g. badminton rackets and shuttlecock
• increase in price of one leads to fall in demand for the other

Question 19

Consumers’ expectations

Answer 19

• future incomes

- future price of good

Question 20

Expectation of price hike (consumers’ expectation)

Answer 20

• expect rise in price
• bring forward consumption, increase spending now
• e.g. Japan: when GST hike was announced, many rushed to buy big ticket items before Oct 2019

Question 21

Expectation of income increase (NPD)

Answer 21

• expect greater purchasing power

- increase in demand for some gds and svs

Question 22

Tastes and preferences (NPD)

Answer 22

• when a good becomes fashionable, demand for it rises , curve shifts
• e.g. Ryan Loche lied abt being robbed at Rio de Janerio, commercial sponsors’ reputation affected

Question 23

Population size

Answer 23

• population size increase, no. of consumers increase, ceteris paribus
• market demand for gds and svs increase

Question 24

Demographic structure

Answer 24

• more elderly, more demand for healthcare and nursing related gds and svs
• baby boom- more demand for baby products