Unit 2.2 - Competitive markets: Demand and Supply - Demand

Question 1

What is demand?

Answer 1

Demand of an individual consumer indicates the various quantities of a good (or a service) the consumer is willing and able to buy at different possible prices during a given time period, Ceteris paribus

Question 2

What does the law of demand state?

Answer 2

According to the law of demand there is a negative relationship between price and quantity demanded over a particular time period
as the price of the good increases, the quantity demanded falls.

Question 3

What is market demand?

Answer 3

The sum of all individual demands for a good.

Question 4

What does market demand look like in diagram form?

Answer 4

Consumer A’s demand plus Consumer b

Question 5

What does market demand look like in diagram form?

Answer 5

Consumer A’s demand plus Consumer B’s demand = Market Demand

Question 6

What are non-price determinants of demand?

Answer 6

The variables other than pricethat can influence demand. They are the variables assumed to be unchanging through the ceteris paribus

Question 7

What is the effect of NPD on the demand curve?

Answer 7

Changes in the NPD of demand cause shifts in the demand curve: entire demand curve shifts either left or right.

Question 8

What is a rightward shift of the demand curve known as?

Answer 8

An increase in demand

Question 9

What is a leftward shift of the demand curve known as?

Answer 9

A decrease in demand

Question 10

Inferior goods

Answer 10

Goods where the demand for the good varies inversely with demand

Question 11

Income in the case of inferior goods

Answer 11

Demand falls s the consumer income increases
Examples include second hand clothes, used cars and bus tickets
As income increases, consumers switch to more expensive alternatives, so the demand for the inferior good falls
Thus an increase in income results in a leftward shift of the curve and a decrease in inome results in a rightward shift of the curve.

Question 12

Normal goods

Answer 12

Goods where their demand varies directly with income.

Question 13

Income in the case of normal goods

Answer 13

Demand increases in responseto an increase in consumer income
Most goods are normal goods
Increase in income leads to a rightward shift of curve
Decrease in income leads to a leftward shift of curve

Question 14

Preferences and tastes

Answer 14

If preferences and tastes change in favobur of the good, it becomes more popular
Demand increases and the demand curve shifts rightward
If preferences and tastes change against the product it becomes less popular
Demand decreases and the demnd curve shifts leftward

Question 15

Subsitutes (Definition)

Answer 15

Goods which satisfy similar needs

Question 16

Price of related goods - Substitutes

Answer 16

An example would be Coca Cola and Pepsi
A fall in the price of one results in an increase in demand of the other and vice versa
This is because as the price of Coca Cola falls for example some consumers will switch to Pepsi increasing the demand for Pepsi
For any two substitute goods X and Y, a decrease in the price of X produces a leftward shift in the demand of Y. An increase in the price of X produces a rightward shift in the demand of Y.
Other examples include oranges and apples. Cadbury’s and Nestle’s chocolate, milk and yoghurt.in

Question 17

Complementary goods

Answer 17

Goods which tend to be used together

Question 18

Prices of related goods - Complementary goods

Answer 18

An example is computers and computer software
A fall in the price of computers leads to an increase in the demand for computer softwares
This is because the fall in the price of computers results in a greater quantity of computers being bought which results in an increase in demand for computer softwares
For any two complementary goods X and Y, a fall in the price of X, leads to a rightward shift in the demand of Y, and an increase in the price of X leads to a leftward shift in the demand of Y

Question 19

The number of consumers

Answer 19

If there is an increase in the number of consumers, demand increases and the market demand shifts rightward
If the number of consumers decreases, the demand decreases and the market demand shifts leftward

Question 20

Movement vs Shift of demand curve

Answer 20

Any change in price produces a change in quantity demanded, shown by a movement along the demand curve.
Any change in a non-price determinant of demand leads to a change in demand, shown by a shift of th entire demand curve

Question 21

(HL) Utility

Answer 21

The satisfaction consumers gain from consuming something.
A subjective concept because satisfaction is something that depends entirely upon personal tastes and preferences which vary form person to person.

Question 22

(HL) Total utility vs Marginal Utility

Answer 22

Total utility is the total satisfaction a consumer gains while marginal utility is the extra satisfaction a consumer gains

Question 23

(HL) Effect of increasing units of a good/service on Marginal and total utility

Answer 23

As the amount the total utility increases by decreases, the marginal utility decreases until the total utility decreases causing the marginal utility to fall below 0.

Question 24

(HL) Explanation of law of demand using law of diminishing marginal utility.

Answer 24

According to the law of demand, as the price of a good decreases, the quantity demanded increases ceteris paribus. The law of diminishing marginal utility shows that if the consumer derives less and ;ess utility from each additional unit consumed then they would only buy additional units of the good or service if the price falls.

Question 25

(HL) Law of diminishing marginal utility

Answer 25

As consumption of a good increases, marginal utility decreases with each additional unit consumed

Question 26

(HL) Sustitution effect and the explanation of law of demand

Answer 26

If the price of a good falls, the consumer substitutes/buys more of the now less expensive good
Therefore quantity demanded increases.
There is always a negative relationship between price and quantity demanded as a result of the substiution effect

Question 27

The income effect and the explanation of law of demand

Answer 27

If the price of a good falls, the consumer’s real income/purchasing power has increases
Therefore quantity demanded increases and there is a negative relationship between price and quantity demanded