topic 5 - demand

Question 1

what is a demand function

Answer 1

it shows the relationship between the quantity of a good a consumer wants to buy and the factors that influence it like prices and income

Question 2

what bundle does consumer choose

Answer 2

the bundle of goods that maximise their utility while satisfying their budget constraint

Question 3

types of demand functions

Answer 3

marshallian demand (ordinary demand), hicksian demand (compensated demand)

Question 4

marshallian demand

Answer 4

solution to utility maximisation problem, shows how much of a good a consumer will buy given prices and income

Question 5

hicksian demand

Answer 5

the solution to the expenditure minimisation problem, shows how much of a good a consumer would buy to achieve a specific utility Lebel while minimising spending

Question 6

substitution effect

Answer 6

the consumer substitutes toward the cheaper good, if apples become cheaper than oranges, the consumer buys more apples

Question 7

income effect

Answer 7

the price change affects the consumers real income, if apples are cheaper the consumer feels richer

Question 8

normal goods

Answer 8

demand increases when income rises

Question 9

inferior goods

Answer 9

demand decreases when income rises

Question 10

giffen goods

Answer 10

a special case of inferior goods where demand increases when the prices rise

Question 11

price elasticity of demand (own price elasticity)

Answer 11

measures how demand changes when the goods price changes

Question 12

income elasticity of demand

Answer 12

measures how demand changes with income

Question 13

cross-price elasticity of demand

Answer 13

measures how the demand for one good changes when the price of another good changes (pos substitutes, neg complements)

Question 14

individual demand curve

Answer 14

shows how the quantity demanded by a single consumer changes with price

Question 15

market demand curve

Answer 15

the horizontal sum of all individual demand curves