Determinants of Demand and Consumer Income Quiz

Determinants of Demand

• Consumer income affects demand: an increase in income leads to an increase in purchasing power, resulting in higher consumption of goods.
• Engel's law: as income increases, food expenditure decreases, and consumers tend to stock sufficient food for future consumption.
• Normal goods: demand increases when income rises, examples include food, cloth, etc.
• Inferior goods: demand decreases when income rises, examples include fish (consumers may choose to buy beef instead).
• Luxury goods: expensive goods that are purchased for their perceived status, demand increases with income.
• Veblen goods: goods that contradict the law of demand, demand increases even when price rises.

Prices of Related Goods

• Substitution effect: when the price of a product rises, consumers shift to another product with a lesser value but same benefit.
• Complementary goods: an increase in price of one good leads to a decrease in demand for the other, examples include gasoline and automobiles, computer and software.

Market Analysis

Types of Markets

• Factor Market: where factors of production are bought and sold.
• Goods Market: where consumer goods are bought and sold.
• Labor Market: where employees find jobs and provide services.
• Financial Market: where securities of companies/individuals are traded.

Basic Principles of Demand

• Demand: the willingness and ability of consumers to buy a certain quantity of a good or service at a given price.
• Quantity Demanded: the total number of goods and services that buyers are willing and able to purchase at a given price.
• Market Demand: the aggregate demand of all consumers who buy a product/service in the market.
• Demand Schedule: a table showing the quantity of a product demanded at various prices.
• Demand Function: a graphical representation of how the determinants affect the quantity demanded of a product.

Law of Demand

• As price increases, the quantity demanded of the product decreases, and vice versa, holding all other factors constant.
• Price and quantity demanded are inversely proportional, meaning one variable goes up while the other goes down.

Conditions and Assumptions of the Law of Demand

• No change in consumer income.
• No change in consumer taste and preference.
• No change in the price of substitute or complementary goods.

Demand Curve

• A graphical representation of the demand schedule.
• The normal demand curve slopes downward from left to right.