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Questions and Answers
According to the Law of Demand, what happens to the quantity demanded as price decreases?
What term describes the relationship between price and quantity demanded in the Law of Demand?
Which of the following is an assumption of the Law of Demand?
What is a condition required for the Law of Demand to hold true?
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In a demand curve, what direction does it slope?
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What does a demand function illustrate?
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'If consumer income varies, what might happen to the Law of Demand?' What type of question is this?
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What is the effect on quantity demanded if consumer taste and preference remain constant?
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Which of the following is a key feature of a demand curve?
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Study Notes
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.
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Description
Test your knowledge of the determinants of demand and the impact of consumer income on purchasing power. Learn about concepts like Engel's law and normal goods. Explore how changes in consumer income can affect the demand for different types of goods.
