Demand Analysis in Economics

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Questions and Answers

What is demand in Economics?

Demand in Economics refers to a desire backed by willingness and ability to pay for a good or service.

Demand = ______ + willingness to purchase + ability to pay.

Desire

Demand schedule shows the relationship between price and quantity supplied of a commodity.

False

Individual demand refers to the quantity of a commodity demanded by all consumers in the market at a given price.

False Signup and view all the answers

What is the relationship between price and quantity demanded shown by an individual demand schedule?

The relationship between price and quantity demanded in an individual demand schedule is inverse. As price increases, the quantity demanded decreases, and vice-versa. Signup and view all the answers

What does a downward-sloping demand curve indicate?

A downward-sloping demand curve indicates an inverse relationship between price and quantity demanded. Signup and view all the answers

What is the key difference between individual demand and market demand?

Individual demand refers to the quantity demanded by a single consumer, while market demand represents the total quantity demanded by all consumers in the market. Signup and view all the answers

Market demand curve can be obtained by horizontally adding all individual demand curves.

True Signup and view all the answers

Which of the following factors can influence the demand for a good?

Consumer tastes and preferences Signup and view all the answers

What is the 'Law of Demand'?

The law of demand states that, other things being equal, the quantity demanded of a good decreases as its price increases and vice-versa. Signup and view all the answers

What are the assumptions on which the law of demand is based?

The assumptions of the law of demand include constant income levels, no change in population size, constant prices of substitutes and complements, no expectations about future price changes, unchanged consumer tastes and preferences, and no changes in taxation policy. Signup and view all the answers

Giffen's paradox is an exception to the law of demand, where the demand for a good increases as its price increases.

True Signup and view all the answers

What are the key factors that cause 'expansion of demand'?

Expansion of demand occurs when there is an increase in the quantity demanded due to a fall in the price of the good, while all other factors (like income, tastes, expectations, etc.) remain constant. Signup and view all the answers

How is 'contraction of demand' different from 'decrease in demand'?

Contraction of demand refers to a decrease in quantity demanded due to a rise in price only. The other determinants of demand remain constant. Decrease in demand, on the other hand, is a shift in the demand curve to the left due to changes in factors other than price, such as income, tastes, or expectations. Signup and view all the answers

Increase in demand implies a shift of the demand curve to the right, indicating a greater demand at all price levels.

True Signup and view all the answers

What are the key differences' between 'aggregate demand' and 'demand'?

Demand is a microeconomic concept, referring to the quantity of a good or service that a single consumer is willing to buy at a specific price and time. Aggregate demand, on the other hand, is a macroeconomic concept, reflecting the total demand for all goods and services in an economy at a given price level and time. Signup and view all the answers

Which of the following is an example of a 'prestige good'?

A luxury car Signup and view all the answers

Study Notes

Demand Analysis

Demand is the desire backed by the willingness and ability to pay for a commodity.
Utility is the basis of demand, desire or need to have a commodity.
Demand schedule is a table showing the relationship between price and quantity demanded.
Individual demand schedule shows the quantity of a commodity a consumer is willing to buy at various prices.
Market demand schedule shows the total quantity of a good demanded by all consumers at different prices.
Individual demand curve graphically represents the relationship between price and quantity demanded by an individual.
Market demand curve is a horizontal summation of individual demand curves.
The demand curve slopes downward, illustrating an inverse relationship between price and quantity demanded.

Meaning of Demand

Demand in everyday language refers to a desire.
In economics, demand is a desire backed by the willingness and ability to pay.
Demand is an effective desire; all desires are not demands.
Demand must have all three elements: desire; ability to pay; willingness to purchase.

Determinants of Demand

Price: Higher price, lower quantity demanded; lower price, higher quantity demanded.
Income: Higher income leads to higher demand for normal goods; lower income leads to lower demand for normal goods.
Prices of related goods (substitutes and complements): Substitute goods (e.g., coffee and tea); the price of one good affects the demand for the other. Complement goods (e.g., car and fuel).
Tastes and preferences: Consumer preferences influence demand.
Consumer expectations: Expected price changes affect current demand (e.g., expecting a price rise will lead to more purchases now).
Size of population and consumer composition: Population size is a key factor.
Advertising and marketing: Marketing efforts influence demand.
Government policies: Government policies impact the demand for certain goods.
Fashion, habits, tastes: Consumer preferences, including fashion trends or habits influence demand.

Exceptions to the Law of Demand

Giffen goods: Inferior goods for which demand increases as price increases (e.g., inferior staple foods).
Prestige goods: Luxury goods for which demand increases as the price increases (e.g., luxury cars).
Speculation: Goods that are expected to increase in price will see increased demand.
Price illusion: Consumers assume higher-priced goods are of better quality.
Ignorance of substitute prices: Consumers may not be aware of the lower price of substitute products.
Habit and custom: Demand for certain goods persists due to habit and custom, despite price increases (e.g., nicotine).

Types of Demand

Direct demand: Refers to consumer goods (directly purchased)
Indirect demand: Refers to intermediate or producer goods (needed for further production).
Joint demand: The simultaneous demand for two or more goods, used together (e.g., fuel and car).
Composite demand: Demand for a good with multiple uses (e.g., electricity).
Competitive demand: Demand for goods that can be substituted (e.g., tea and coffee).

Expansion and Contraction of Demand

Expansion of demand: An increase in the quantity demanded due to a fall in price of the good (holding all other factors constant). It moves along the demand curve.
Contraction of demand: A decrease in the quantity demanded due to an increase in the price of the good (holding all other factors constant). It moves along the demand curve.

Increase and Decrease in Demand

Increase in demand: An upward shift of the demand curve due to factors other than the good's own price (e.g., taste, income).
Decrease in demand: A downward shift of the demand curve due to factors other than the good's own price (e.g., tastes, income).

Market Demand Analysis

Market demand refers to the total demand for a commodity at a given price point during a particular period.
The market demand schedule specifies the total quantity demanded at various prices.
Market demand curve is derived by summing the demand curves of all individual consumers at each price.

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Description

This quiz explores the fundamental concepts of demand in economics, including demand schedules, curves, and utility. Understand the relationship between price and quantity demanded through individual and market demand perspectives. Test your knowledge on how demand influences market behavior.