The allocation of resources - Demand (3)
Resources |
Revision Questions |
Economics
Login to see all questions
Click on a question to view the answer
1.
Question 2
The diagram below illustrates the demand curve for petrol.
Explain, with reference to the diagram, what would happen to the equilibrium price and quantity of petrol if the price of diesel increased.
Answer: Petrol and diesel are substitutes. If the price of diesel increases, consumers will switch to buying more petrol, leading to an increase in the demand for petrol. This will cause the demand curve for petrol to shift to the right.
The rightward shift in the demand curve will result in a new equilibrium point at a higher price and a higher quantity of petrol. The equilibrium price of petrol will increase, and the equilibrium quantity of petrol demanded will also increase. The diagram shows this shift to the right and the corresponding increase in both price and quantity.
- Price: Increases
- Quantity: Increases
2.
Define 'demand' in the context of economic analysis. Explain why it is important to understand the concept of demand when analyzing market equilibrium.
Definition of Demand: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price during a specific period of time. It's not simply a desire for a product; it's the desire coupled with the financial ability to acquire it.
Importance to Market Equilibrium: Understanding demand is crucial for analyzing market equilibrium because it is one of the two fundamental forces that determine the equilibrium price and quantity. The interaction of demand and supply dictates where the market meets.
If demand is high relative to supply, prices tend to rise. If supply is high relative to demand, prices tend to fall. Analyzing demand helps economists predict how changes in consumer preferences, income, or prices will affect the market outcome. Without a clear understanding of demand, it's impossible to accurately predict market fluctuations and assess the impact of government policies.
3.
Question 3
The following demand diagram shows the demand for mobile phones.
Suppose that the consumer's expectations are that the price of mobile phones will increase significantly in the future. Explain, with reference to the diagram, how this expectation would affect the current market equilibrium price and quantity.
Answer: If consumers expect the price of mobile phones to increase significantly in the future, they will be more inclined to purchase mobile phones now. This is because waiting will result in a higher price later.
This increased current demand will cause the demand curve to shift to the right. The new equilibrium point will be at a higher price and a higher quantity. Consumers are willing to buy more mobile phones at each price level, anticipating future price increases. The diagram illustrates this shift to the right and the resulting increase in both equilibrium price and quantity.
- Price: Increases
- Quantity: Increases