Theory of demand

Question 1

Reason of change in Demand

Answer 1

Non-price determinants

Question 2

How is change in Demand represented?

Answer 2

By shift of the demand curve

Question 3

What causes change in quantity demanded ?

Answer 3

Changes in price

Question 4

What is changes in quantity demanded represented by?

Answer 4

Movement of a point along the demand curve

Question 5

Change in Quantity demanded

1. Fall in price leads to ______ in QD, represented by _______ movement
2. Rise in price leads to ______ in QD, represented by _______ movement

Answer 5

1. Fall in price leads to increase in QD, represented by downward movement
2. Rise in price leads to decrease in QD, represented by upward movement

Question 6

How is the increase in demand represented by the curve?

Answer 6

Rightward shift

(QD increases as well)

Question 7

How is decrease in Demand shown in the demand curve and what happens to QD?

Answer 7

Leftward shift

(QD decreases)

Question 8

Definition of Demand

Answer 8

The amount of good or service that consumers are both willing and able to buy at each possible price in a given period of time, ceteris paribus

Question 9

Assumptions in Demand

Answer 9

1. Given period of time
2. Ceteris Paribus - the assumption that every other variable that affects the demand of a good or service (eg. income, consumer tastes and preferences, price expectations etc) remains constant

Question 10

Demand is represented by…

Answer 10

The demand curve

Question 11

Quantity demanded is represented by…

Answer 11

A point given on the demand curve

Question 12

What is the Law of Demand?

Answer 12

It states that in a given time period, the quantity demanded of a product is inversely related to it’s price, ceteris paribus

Question 13

Example of Law of Demand

The higher the price of a good or service, CP, the ____ willing and able consumers are to buy it, hence the ______ the quantity demanded.

Answer 13

The higher the price of a good or service, CP, the less willing and able consumers are to buy it, hence the smaller the quantity demanded.

Question 14

Reason for Law of Demand

Answer 14

Law of Diminishing Marginal Utility (LDMU)

Question 15

Definition of Law of Diminishing Marginal Utility (LDMU)

Answer 15

It states that beyond a certain point of consumption, as more and more units of a good or service are consumed, the additional utility derived from each additional unit consumed will fall.

Question 16

Individual demand

Answer 16

Demand of one customer

Question 17

Consumers income (normal and inferior goods)

Question 18

Definition of normal goods

Answer 18

Good whose demand varies directly w consumers income

Question 19

Definition of inferior goods

Answer 19

Goods whose demand varies inversely with consumers income

Question 20

Consumers income (normal goods)

Answer 20

1. income increase
2. purchasing power increase
3. consumers willing and able to buy at each and every price
4. Demand increases

When consumer income increases, demand for normal goods decreases

Question 21

Consumers income (inferior goods)

Answer 21

1. Consumers income increase
2. Less willing to buy inferior goods at each and every price

Question 22

Factors impacting demand

Answer 22

Expectations of prices and income + Ease of borrowing
Gov policies
Yed - Income (inferior and normal)
Price of related goods (substitutes and complements - XED and pop size)
Tastes and preferences
Seasonal factors

Question 23

Price of related goods consist of

Answer 23

Substitutes , complements and derived demand

Question 24

Definition of substitutes

Answer 24

Subsidies in consumption (or goods in competitive demand) are goods used in place of one another for the satisfaction of a particular purpose

Question 25

Definition of complements

Answer 25

Goods in joint demand are goods used in conjunction with one another in the satisfaction of particular purpose

Question 26

Definition of derived demand

Answer 26

Demand for a factor of production that results from the demand of a final good

Question 27

Diff between complements and derived demand

Answer 27

Complements - both finished goods Derived demand - one is factor input, one is finished good

Question 28

Consumers tastes and preferences

Answer 28

Affected by peers, ads, trends etc etc Can increase or decrease

Question 29

Consumers expectations (exp)

Answer 29

If consumers expect the price of a good to *increase* in the future, they will buy more now, current demand increase vice versa

Question 30

Ease and cost of borrowing (exp)

Answer 30

Availability of loans Demand increases Fall in interest rate Demand decreases

Question 31

Size and composition of population

Answer 31

Increase in size of pop. -> increase in consumers -> increase in demand Aging population -> increase demand for amenities for elderly etc