Week 4

Question 1

First law of demand?

Answer 1

consumers demand more as price falls, assuming other factors are held constant

Question 2

Demand curve definition

Answer 2

Known as the average revenue curve - relates the price of a product to the quantity demanded by consumers.

Question 3

Which way is the demand curve sloping and why?

Answer 3

Slopes downwards and reflects the law of demand, which states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa

Question 4

Definition of Aggregate demand

Answer 4

Buying behaviour of a group of consumers - a total of all the individual demand curves

Question 5

Factors influencing demand

Answer 5

TIMER
T: Tastes and Preferences – Consumer preferences influence demand for a product or service.
I: Income – As income increases, demand for goods and services often increases as well.
M: Market Size – The number of potential buyers in the market affects demand.
E: Expectations – If consumers expect prices to rise in the future, they may increase demand now.
R: Related Goods – The demand for a product can be influenced by the prices of related goods (substitutes and complements).

Question 6

Normal good definition

Answer 6

When people earn more money, they tend to buy more of a normal good e.g electronics, dining

Question 7

Inferior goods

Answer 7

When people earn more money, they tend to buy less of an inferior good, and when their income falls, they may buy more of it e.g Public transportation: People may use public transportation more when they have lower incomes but prefer driving their own cars when their incomes rise.

Question 8

Price elasticity of demand definition

Answer 8

measures how the quantity demanded of a good or service responds to changes in its price.

Question 9

Price elasticity of demand equation

Answer 9

%changeinquantitydemanded / (% change in price)

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Question 10

Elastic demand definition

Answer 10

The quantity demanded changes by a larger percentage than the price change. Consumers are highly responsive to price changes.
Example: Luxury goods, non-essential items like designer clothing. (PED > 1)

Question 11

Inelastic demand definition

Answer 11

The quantity demanded changes by a smaller percentage than the price change. Consumers are less responsive to price changes.
Example: Necessities like gas, basic food items, or medications. (PED < 1)

Question 12

Factors Affecting Price Elasticity of Demand

Answer 12

Substitutes
Necessity
Time Period
Proportion of Income
Addictiveness

Question 13

Economies of scale

Answer 13

cost advantages that a business achieves as it increases its level of production.

Question 14

Economies of scope

Answer 14

cost advantages that a business can achieve by producing a variety of products together, rather than producing each product separately.

Question 15

Economies of scope equation

Answer 15

Cost(Q1,Q2)<Cost(Q1)+Cost(Q2)

Question 16

Diseconomies of scope

Answer 16

when the cost of producing two products together is higher than the cost of separate production.
This would apply to a situation where the production of one good has the potential to contaminate another e.g. in the production of semiconductors.
e.g peanuts