Economics Theory of Demand

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Questions and Answers

Demand is defined as the ability and willingness to buy a particular commodity or service at a given period of time. Demand for a commodity in an economic sense arises when there is a need for the commodity and when the consumers have the ______ to pay for it.

money

The law of demand states that the lower the price, the greater the quantity demanded at a given point in time, all other things being equal.

True

What is the substitution effect as it relates to the law of demand?

When the price of a good rises, consumers tend to substitute it for other goods with similar or different qualities that have remained at a lower price.

What is the real income effect as it relates to the law of demand?

When the price of a good rises, the real income of the consumer falls, and less of the goods are likely to be purchased. Signup and view all the answers

Giffen goods are an exception to the law of demand. What is the most common characteristic of Giffen goods?

Their demand increases as the price rises. Signup and view all the answers

Match the following economic terms with their definitions:

Substitute goods = Goods that are used together, like coffee and creamer. Complementary goods = Goods that can be used in place of one another, like tea and coffee. Signup and view all the answers

The demand curve shifting to the right indicates a decrease in demand.

False Signup and view all the answers

Which of the following will NOT cause a shift in the demand curve for DVDs?

A change in the price of DVDs Signup and view all the answers

If the demand for mac and cheese decreases as income increases, mac and cheese is a(n):

Inferior good Signup and view all the answers

If the demand for green tea increases as income increases, green tea is a(n):

Normal good Signup and view all the answers

During an economic upturn when consumer income rises, the demand for caviar increases and the demand for hummus decreases. This implies that caviar:

is a normal good and hummus is an inferior good Signup and view all the answers

An increase in demand for laptop computers would likely be caused by:

An increase in the price of a substitute good Signup and view all the answers

The quantity demanded of Coca-Cola has increased. The best explanation for this is that:

Coca-Cola consumers had an increase in income Signup and view all the answers

Study Notes

Theory of Demand

Economics studies how societies allocate scarce resources to meet unlimited needs.
This chapter focuses on the theory of demand, a crucial part of the price mechanism.
Demand is the ability and willingness to purchase a commodity or service at a specific time. It arises from both a need and the consumer's available funds.

Definition of Demand

Demand is the ability and willingness to buy something at a given time.
Demand only exists when there's a need for a product and buyers can afford it.

Demand Curve

Individual demand schedule shows quantities of a good a consumer will buy at various prices, all other factors remaining constant (ceteris paribus).
The individual's demand curve is a graphical representation of the individual demand schedule. It shows the relationship between the price of a good and the quantity demanded, assuming all other factors remain fixed.
The quantity an individual will buy depends on the good's price, their income, other goods' prices (substitutes / complements), tastes, promotion, population, and future price expectations.

Table of Demand Schedule

A table showing prices (Px) and corresponding quantities (Qdx) demanded for commodity X. (See Table 2.1 in the attached content for specific data.)

Law of Demand

The lower the price, the greater the quantity demanded (ceteris paribus). This inverse relationship is shown by the downward sloping demand curve.
Demand curves usually slope downward from left to right, showing this relationship.
Exceptions exist. Giffen goods and Veblen goods. (See detailed explanation further down).

Equation of Demand

Qdx = f(Px, Po, Y, T, A, P, E, Z)
This equation shows quantity demanded (Qdx) is dependent upon the price of the product, prices of related goods, income, tastes, advertising, population, and expectations.

Factors Affecting Demand (Other than Own Price)

Price of related goods: Substitute goods (e.g., tea and coffee) - If the price of a substitute falls, demand for the original good decreases. Complementary goods (e.g., printers and ink) - If the price of a complement rises, demand for the original good decreases.
Consumer income: Generally, demand for normal goods increases with income, while demand for inferior goods decreases with income.
Taste and Preferences: Preferences can shift demand curves. If a product becomes fashionable, demand increases.
Consumer Expectations: If consumers anticipate future price increases, they may buy more now, shifting the curve.
Size of the Population: The larger the population, generally the greater the demand.
Advertising: Advertising can shift demand by altering consumer perceptions.

Exceptions to the Law of Demand

Giffen goods: Goods for which demand increases when prices rise, typically because they are essential to low-income consumers and there are few readily available substitutes.
Veblen goods: Goods whose demand increases as the price increases, often seen as luxury or status goods. (See detailed explanations further down).

Market Demand

Aggregate demand for a commodity by all consumers. It's derived by summing individual demand curves horizontally.

Change in Demand vs. Change in Quantity Demanded

Change in Demand: A shift of the entire demand curve, caused by factors other than the price of the good.
Change in Quantity Demanded: Movement along the demand curve, caused by a change in the price of the good.

Further Details/Additional points

The document provides data examples, figures, and explanations of specific concepts like Giffiens and Veblen Goods, and the different types of goods. Refer to the appropriate section in the document for those definitions.

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Description

Explore the fundamentals of demand in economics with this quiz. Understand the definition of demand, the demand curve, and how individual purchasing behavior is influenced by price. This essential theory is vital for grasping how resources are allocated in society.