Competitive Markets: Demand

The law of demand states that

• there is a positive relationship between price and quantity demanded

• there is an inverse relationship between price and demand

• there is an inverse relationship between price and quantity supplied

• there is an inverse relationship between price and quantity demanded

Answer explanation

The law of demand deals with quantity demanded

Which of the following is likely to leave the demand for chocolate unaffected?

• a fall in the price of chocolate

• an increase in incomes when chocolate is a normal good

• a change in consumer tastes in favour of chocolate

• a change in the price of ice cream, where ice cream is a substitute for chocolate

Answer explanation

A fall in price results in a change in quantity demanded. Not demand.

Which of the following is likely to lead to a fall in demand for tennis balls?

• a fall in the price of tennis rackets

• a fall in the price of tennis balls

• a fall in the cost of producing tennis balls

• a fall in incomes assuming tennis balls are a normal good

Answer explanation

If tennis balls are a normal good, then people will demand less of them as their incomes fall.

Ceteris paribus, if the price of a complementary good falls then the related good’s

• demand will increase

• demand will decrease

• quantity demanded will increase

• quantity demanded will decrease

Answer explanation

As complementary goods are non-price determinants, two goods commonly purchased together, this will result in an increase in the demand of one good if the other falls in price.

Which of the following can be expected to lead to a decrease in the demand for coffee?

• a fall in the price of tea

• an increase in the price of tea

• an increase in the cost of producing coffee

• an increase in the cost of producing tea

Answer explanation

Tea and coffee could be considered substitutes for each other. If tea becomes less expensive, the demand for coffee will fall as people go for the cheaper alternative, tea.

Using the diagram, show the impact of the following on the demand curve for Product A: The number of consumers in the market for Product A increases.

• D1

• D2

• D3

Using the diagram, show the impact of the following on the demand curve for Product A: Consumer income increases and Product A is an inferior good.

• D1

• D2

• D3

Using the diagram, show the impact of the following on the demand curve for Product A: Consumer income decreases and Product A is a normal good.

• D1

• D2

• D3

Using the diagram, show the impact of the following on the demand curve for Product A: A news report claims that the use of Product A has harmful effects on health.

• D1

• D2

• D3

Using the diagram, show the impact of the following on the demand curve for Product A: The price of substitute Good B falls.

• D1

• D2

• D3