Study Notes
The demand curve represents the relationship between the price of a good and the quantity demanded by consumers. It is important to understand the difference between movements along the demand curve, which are caused by price changes, and shifts of the demand curve, which are caused by changes in non-price factors.
- Demand — the quantity of a good or service a consumer is willing and able to buy at various prices during a given period of time, ceteris paribus. Example: A consumer may demand 10 apples at 2 each.
- Law of Demand — states that price and quantity demanded have an inverse relationship, ceteris paribus. Example: If the price of coffee increases, the quantity demanded decreases.
- Diminishing Marginal Utility — the decrease in additional satisfaction or utility from consuming an additional unit of a good. Example: The first slice of pizza provides more satisfaction than the fourth slice.
- Substitutes — goods that can replace each other in consumption. Example: Tea and coffee are substitutes.
- Complements — goods that are consumed together. Example: Bread and butter are complements.
Exam Tips
Key Definitions to Remember
- Demand
- Law of Demand
- Diminishing Marginal Utility
- Substitutes
- Complements
Common Confusions
- Confusing movements along the demand curve with shifts of the demand curve
- Misunderstanding the impact of non-price factors on demand
Typical Exam Questions
- What causes a movement along the demand curve? A change in the price of the good.
- What factors can cause a shift in the demand curve? Changes in income, tastes, or prices of related goods.
- How does the law of diminishing marginal utility affect consumer behavior? It explains why consumers are willing to pay less for additional units.
What Examiners Usually Test
- Understanding of the inverse relationship between price and quantity demanded
- Ability to distinguish between movements along and shifts of the demand curve
- Application of the concept of diminishing marginal utility