Topic 2: Demand and Shifts in the Demand Curve

Question 1

Define Law of demand

Answer 1

(all other things being equal)

• quantity demanded falls when price rises
• Demand is inversely (negatively) related to price

Question 2

define demand

Answer 2

quantities of a good that buyers are willing and able to pay at various prices

Question 3

whats a demand schedule

Answer 3

table

Question 4

at what price is usually the max demanded

Answer 4

0

Question 5

what 3 things explain the law of demand? why it slopes downwards?

Answer 5

1. substitution effect
2. income effect
3. diminishing marginal utility

Question 6

explain substitution effect

Answer 6

• price increases, consumers substitute away from this good > relatively cheaper alternative
• Example: oranges to apples

Question 7

explain income effect

Answer 7

• • Decreased price = purchasing power of our existing income has increased
• note: income fixed

Question 8

explain diminishing marginal utility

Answer 8

• As individuals consume more, enjoy additional units of that good less and less

Question 9

difference between market and individual demand

Answer 9

Individual demand: demand of certain individual

Market Demand: sum of all individual demands

Question 10

what is a non price factor

Answer 10

variables that shifts demand curve

Question 11

what does a shift to right mean in demand

Answer 11

increase demand

Question 12

what does a shift to left mean in demand

Answer 12

decrease demand

Question 13

what is expressed differently for ‘movement along curve’ and shift of curve;

Answer 13

• Movement along curve: ‘Change in quantity demanded’

- Shift of curve: ‘change in demand’

Question 14

how is income a non price factor

Answer 14

• Increase/ decrease in income > consumers are willing and able to buy more/ or less of a good (at each and every price)

Question 15

difference between normal and inferior good

Answer 15

o Normal good: increase in income > increase in demand (e.g. iPhones)
o Inferior good: increase in income > decrease in demand (e.g. instant coffee)

Question 16

how is price of relative goods a non price factor

Answer 16

o Substitutes (alternatives): two goods for which a decrease in price of one good > decrease demand for the other good

o Complements: two goods for which a decrease in price of one good > increase demand of another good

Question 17

what does price of relative good refer to in terms of which goods price is changed

Answer 17

relates to change of price other good, not graphed good

Question 18

how is a change in preference a non price factor

Answer 18

o Change in preference towards good > increase demand (right shift)
o Change in preference away from good > decrease demand (left shift)

Question 19

when does the curve shift (rather than move along)

Answer 19

when change in relevant factor not measured on axis

Question 20

what is the determinant of whether there is a shift or movement of curve

Answer 20

price / non price