What Determines Demand In Market

Question 0

Product market

Answer 0

Goods and services which the consumer derives utility from

Question 1

Market

Answer 1

Where buyers and sellers come into contact for the purpose of exchange

Question 2

Commodity market

Answer 2

Raw materials , minerals used in the production of goods and services

Question 3

Labour market

Answer 3

Buying and selling of labour time for the production of goods and services

Question 4

Demand

Answer 4

Quantity of a good/ service purchased at a given price over a given time period

Question 5

Why does demand curve slope downwards from left to right? (2)

Answer 5

1) Substitution effect - when price of good falls it becomes cheaper relative to its substitutes and some consumers switch their purchases from more expensive substitutes to good in question
2) income effect - when price of good falls , real income of consumer might rise - purchasing power of consumers nominal income has increased and so more of good can be bought

Question 6

Movement along demand curve

Answer 6

Only when there is change in price

1) fall- extension of demand
2) rise- contraction in demand

Question 7

Shits in demand curve

Answer 7

1) Fall in price of complementary goods
2) rise in price of substitutes
3) change in fashion and tastes which make the good more popular
4) increased advertising
5) increase in real income
6) decrease in income tax - increases disposable income and makes good more affordable
7) increase in population or change in age structure
8) increases in credit facilities which make it easier to obtain funds

Question 8

Price elasticity of demand

Answer 8

Responsiveness of demand to a change in price

PED= % change in Q demanded of good A / % change in P of good A

Question 9

If PED is greater than 1

Answer 9

Good is price elastic - % change in demand is greater than % change in price

Question 10

If PED is less than one

Answer 10

Good is price inelastic - % change in demand is less than % change in price

Question 11

PED = 0

Answer 11

Good is perfectly inelastic - % in price has no effect on Q demanded
(Drugs)

Question 12

PED infinite

Answer 12

Good perfectly elastic - rise in price caused demand to fall to zero - demand curve = horizontal

Question 13

Total revenue

Answer 13

Total payments firm receives from selling given quantity of goods / services
Price per unit multiplied by quantity sold

Question 14

How would total revenue increase

Answer 14

Total revenue will increase as long as price is moving towards the mid- position of the demand curve ( where there sins unit elasticity)
IF DEMAND IS ELASTIC- cut in price increases total consumer spending and hence revenue to firm BUT rise in price causes total consumer spending to fall and so from loose revenue
IF DEMAND IS INELASTIC - increase in price increases total consumer spending and hence the revenue to firm BUT fall in prices causes total consumer spending to fall and so firms loose revenue

Question 15

Determinants of price elasticity of demand (6)

Answer 15

1) Availability of substitutes: the more narrowly a good is defined the more substitutes it tends to have and so it’s demand is elastic , the more broadly a good is defined the fewer substitutes it tens to have and so demand is less elastic
2) Luxury / Necessity: luxury - elastic demand necessity- inelastic
3) Addictive & Habit forming - tobacco, alcohol, coffee - price inelastic demand
4) time period: demand is less elastic in the short run than in long run
5) Brand image : when brand has strong brand image demand is price inelastic as consumers are often willing to pay premium price
6) proportion of income spent on good

Question 16

Income elasticity of demand

Answer 16

Responsiveness to demand to change in real income
YED= % change in demand for good/ % change in real income
Positive for normal goods and negative for inferior goods

Question 17

Cross elasticity of demand

Answer 17

Responsiveness of demand of good B to change in price of good A
XED = % change in demand for good B / % change in price of good A
Substitutes - in competitive demand so positive gradient
Complementary - joint demand , consumer together - negative gradient

Question 18

Latent demand

Answer 18

there is willingness to buy good but consumers lack purchasing power to be able to afford it

Question 19

Derived demand

Answer 19

The demand for product X might be connected with the demand for a related product Y e.g. De ad fro steel is strongly linked to the demand for new vehicles and other manufactured products