1. What is the law of demand?
The law of demand states that, all else being equal, as the price of a good or service increases, the quantity demanded for that good or service decreases, and vice versa.
2. Explain the difference between a change in quantity demanded and a change in demand.
A change in quantity demanded is a movement along the demand curve due to a change in the price of the good, while a change in demand is a shift of the entire demand curve caused by factors other than price, such as income or consumer preferences.
3. What are the determinants of demand?
The determinants of demand include:
- Price of the good
- Consumer income
- Prices of related goods (substitutes and complements)
- Tastes and preferences
- Population and demographics
- Consumer expectations about future prices and income
4. What is the income effect in demand?
The income effect refers to how a change in consumer income impacts the quantity demanded for a good. For normal goods, an increase in income leads to an increase in demand, while for inferior goods, an increase in income leads to a decrease in demand.
5. What are substitute goods and complementary goods? Provide examples.
Substitute goods are those that can be used in place of each other (e.g., coffee and tea). Complementary goods are used together, so a change in the price of one affects the demand for the other (e.g., coffee and cream).
6. Explain the concept of elasticity of demand.
Elasticity of demand measures how sensitive the quantity demanded is to changes in price. If a small price change results in a large change in quantity demanded, demand is elastic; if quantity demanded changes very little, demand is inelastic.
7. What factors affect the price elasticity of demand?
Factors affecting price elasticity include the availability of substitutes, necessity vs. luxury, time horizon, and the proportion of income spent on the good.
8. What is the concept of total revenue, and how does it relate to elasticity of demand?
Total revenue is the amount a firm receives from selling its product. For elastic demand, a price decrease increases total revenue, while for inelastic demand, a price decrease reduces total revenue.
9. What is the concept of consumer surplus?
Consumer surplus represents the difference between what consumers are willing to pay for a good and what they actually pay. It measures the benefit consumers receive from purchasing at a given price.
10. Explain the concept of a Giffen good.
A Giffen good is a rare exception to the law of demand where an increase in price leads to an increase in quantity demanded due to a unique set of circumstances, often related to inferior goods.
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