MOST LIKELY COMMON ECONOMICS QUESTION AND ANSWERS (Part III)
Question: What is Demand?
Answer : “The quantity of that commodity which a consumer is willing to buy at a particular price during a particular period of time. “
Question : Mention main features of demand.
- The utility of the commodity
- Effective demand
- Flow concept
- It is the final consumer goods
- The desire of the quantity.
Question: What is the demand function?
It is the functional relationship between demand for a commodity and its determinants.
Functional expression is :
Dx =f (Px, Pz, Y, T, E, N, Yd)
- Dx = Demand for commodity X
- Px = Price of commodity X
- Pz = Prices of related goods
- Y = Income of the consumer
- T = Taste and preferences of the consumer
- E = Future expectation
- N = No. of consumers
- Yd = Distribution of income
Question: What are the factors affecting individual demand for a good?
1. Price of a commodity
There is an inverse relationship between price and demand for the commodity. This relation doesn’t hold good for Giffen goods as there is a direct relationship between price and demand for goods.
2. Prices of other goods
If the price of one good increases, then demand for the substitute good will increase.
If the price of one good increases, then demand for complement good will decrease.
3. Consumer income
Income effect on demand for normal and inferior good : Demand for a normal good rises as income rises and Demand for a inferior good falls as income rises.
4. Tastes and preferences of consumer
Change in consumer’s tastes causes demand to change. If there is a change in tastes in favor of a good, then it will lead to increase in demand and any unfavorable change will lead to decrease in demand.
5. Future expectations of consumer
If it is expected by the consumer that the price of the commodity will rise in future, he will start buying more units of the commodity in the present, at the existing price. Similarly, if he expects that price will fall in future, he will buy less quantity of the commodity.
Question : Law of Demand ?
The law of demand states that if remaining things are constant, as price of a commodity increases demand for the commodity decreases and as price of a commodity decreases demand for the commodity increases.
Assumptions of the law of demand
Law is valid only when the following assumptions hold:
- The price of the related goods remains the same.
- The income of the consumers remains unchanged.
- Tastes and preferences of the consumers remain the same.
- All the units of the goods are homogeneous.
- Commodity should be a normal good.
Question :Demand Schedule?
It is a tabular presentation showing the different quantities of a good that buyers of the good are willing to buy at different prices during a given period of time.
Question : Demand Curve?
The graphical representation of the demand function is called a demand curve.
Question :Reasons for downward slope of demand curve.
- Law of Diminishing Marginal Utility (LDMU)
- Substitution Effect. Substitution effect means with fall in the price of a good, consumer feels a rise in relative price of other goods, which in turn leads to more demand for the good.
- Income Effect. Income effect means with fall in the price of a good, consumer’s real income or purchasing power rises and he demands more units of the good (normal good).
- New Consumers Creating Demand
Question : Factors Affecting Individual and Market Demand
|Individual demand||Market demand|
|1. Price of the good 2. Price of other good 3. Income of the consumer 4. Tastes and preferences of consumer 5. Expectations of buyers||1. Price of the good 2. Price of other good 3. Income of the consumers 4. Tastes and preferences of consumers 5. Expectations of buyers 6. Number of consumers in the market 7. Distribution of Income 8. Age and sex composition of population|
Question : Explain Change in Quantity Demand (Movement) graphically.
A movement along the demand curve is caused by a change in the price of the good, other things remaining constant.
Extension of Demand or Contraction of Demand.
Expansion or Extension of demand refers to rise in demand due to fall in the price of the good. Contraction of demand refers to fall in demand due to rise in the price of the good
Question : Explain Change in Demand (shift) graphically
A shift of the demand curve is caused by changes in factors other than price of the good. A change in factors causes shift of the demand curve. It is also called change in demand.
Increase in Demand.
It refers to more demand at a given price. The causes of increase in demand are:
- Increase in the income of consumers : normal goods.
- Decrease in the income of consumers : inferior goods.
- Increase in the price of substitute goods.
- Fall in the price of complementary goods.
- Consumers’ taste becoming stronger in favour of the good.
Decrease in Demand.
It refers to less demand at the given price. It occurs due to unfavorable changes in factors other than price of the good. The causes of decrease in demand are:
- Fall in the income of the consumers : normal goods.
- Rise in the income of the consumers : inferior goods.
- Fall in the price of substitute goods.
- Rise in the price of complementary goods.
- Consumers’ taste becoming unfavorable towards the good.