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Questions and Answers
What is the primary determinant of demand?
What is the primary determinant of demand?
- Consumer income
- Number of buyers in the market
- Price of the good or service (correct)
- Consumer preferences
Which statement best describes elastic demand?
Which statement best describes elastic demand?
- Demand changes at the same percentage as price changes.
- Demand remains constant regardless of price changes.
- Quantity demanded changes substantially with small price changes. (correct)
- Demand does not change significantly with price changes.
How does an increase in consumers' income typically affect demand?
How does an increase in consumers' income typically affect demand?
- It has no effect on demand.
- It only affects demand for inferior goods.
- It decreases demand for luxury goods.
- It generally increases demand for most goods. (correct)
What impact do expectations of future price increases have on current demand?
What impact do expectations of future price increases have on current demand?
Which of the following goods is likely to have inelastic demand?
Which of the following goods is likely to have inelastic demand?
What effect does the availability of substitutes have on demand elasticity?
What effect does the availability of substitutes have on demand elasticity?
According to the law of demand, what happens to quantity demanded when the price of a good rises?
According to the law of demand, what happens to quantity demanded when the price of a good rises?
In the long run, how does consumers' ability to adjust their consumption patterns affect demand elasticity?
In the long run, how does consumers' ability to adjust their consumption patterns affect demand elasticity?
What does the law of demand indicate about the relationship between price and quantity demanded?
What does the law of demand indicate about the relationship between price and quantity demanded?
Which factor is NOT typically considered when determining market demand for a product?
Which factor is NOT typically considered when determining market demand for a product?
Which of the following best describes a good with elastic demand?
Which of the following best describes a good with elastic demand?
How is market demand calculated?
How is market demand calculated?
What describes a shift in demand caused by changes in consumer income?
What describes a shift in demand caused by changes in consumer income?
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Study Notes
Demand
- Demand is the willingness and ability of consumers to buy goods or services at a specific price.
- Price is a primary factor influencing demand; as prices increase, quantity demanded typically decreases (law of demand).
- Higher consumer income increases purchasing power, leading to increased demand for goods and services.
- Consumer tastes and preferences impact demand; shifts towards healthier options can boost demand for organic products.
- Expectations about future prices and income can prompt consumers to adjust current demand accordingly.
- An increase in the number of consumers in the market raises overall demand, exemplified by population growth or immigration.
- Elasticity of demand measures how responsive quantity demanded is to price changes; it can be elastic, inelastic, or unit elastic.
Elasticity of Demand
- Elastic demand occurs when a small price change leads to a significant change in quantity demanded, often seen in luxury goods and items with close substitutes.
- Inelastic demand means that quantity demanded changes little despite a large price change, typical for necessities and goods with few substitutes.
- Unit elastic demand indicates that price changes result in proportional quantity demanded changes.
- Key determinants of elasticity:
- Higher income levels can lead to more elastic demand.
- Availability of substitutes increases demand elasticity.
- Demand may be more inelastic in the short term and become more elastic over the long term as consumers adjust.
- Luxury goods have more elastic demand compared to necessities.
Resources
- Resources are inputs essential for production and fall into four categories:
- Land: Includes natural resources like minerals, forests, and water.
- Labor: Represents human effort and skills used in production.
- Capital: Comprises manufactured assets like machinery, equipment, and buildings.
- Entrepreneurship: Encompasses the ability to innovate, combine resources, and undertake risks.
- Scarcity refers to the limited nature of resources in relation to the infinite wants of individuals and societies, necessitating resource allocation decisions.
Law of Demand
- As the price of a good decreases, the quantity demanded increases; as price increases, quantity demanded decreases.
- Inverse relationship illustrated through a downward sloping demand curve.
- Demand curve visually represents consumer behavior in relation to price changes.
Market Demand
- Represents the total quantity of a good or service demanded by all consumers at various price levels.
- Calculated by summing individual consumer demands for each price point.
- Influenced by several factors:
- Consumer Preferences: Trends and tastes affecting demand.
- Income Levels: Higher income typically increases demand for normal goods.
- Prices of Related Goods: Substitute goods affect each other’s demand; if one increases, demand for the other may rise.
- Future Price Expectations: Anticipated price increases may lead to higher current demand.
Demand Elasticity
- Reflects responsiveness of quantity demanded to price changes.
- Price Elasticity of Demand: Ratio of percentage change in quantity demanded to percentage change in price.
- Classifications:
- Elastic Demand (>1): Indicates consumers are highly responsive to price changes; large change in quantity demanded for small price adjustments.
- Inelastic Demand (<1): Indicates consumers are less responsive; quantity demanded changes little with price adjustments.
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