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1.

What is the law of demand?

Relatively less quantities of a good will be bought at a high than any lower price.

Why does a demand curve slope downward?

(1)   At a high price, buyers who cannot afford to buy the good drop out of buying. At a low price, however, more buyers can afford goods so more good are bought.

(2)   In the case of the individual buyer, a price increase, given a fixed income, reduces his available budget for other commodities.

(3)   At a high price, it becomes more attractive to buy other goods which are substitutive to it. This reduces the demand for the group.

What are the determinants of demand? What happens to the demand curve when each of these determinants changes?

(1)   Preference patterns – If preferences change so that people want to buy more of a commodity, at a given price, then there is increase in demand. There will be a fall in demand if preferences change again.

(2)   Changing incomes – Increasing incomes raise the demand for goods.

(3)    Effects of distribution of income – If a society’s income is highly unequal, some members of society (rich) may tend to have a demand of luxury goods that few of the citizens can afford. On the other hand, the poorer members may buy an array of essential goods.

(4)   Population change – An increase population leads to increasing demand for some types of goods

(5)   Changes in expectations – Expectations about the future may alter demand for a specific commodity.

Distinguish between a change in demand and a change in quantity demanded, noting cause of each.

Change in demand – Change of the goods needed due to changes in preference, income or change in expectations

Change in quantity demanded – Change in the quantity of goods bought at a given ranged due to change in income, population change, effects of distribution, etc.

2. What effect will the following have on the demand of product B?

A. Product B becomes more fashionable – The demand for product B will increase

B. The price substitute for product C falls – Because of the decrease of the prices; its demand will increase thus making the demand for the other products decrease as well.

C. Income declines and product C becomes an inferior good – Because of the decline of income, the demand for the cheaper good which is product B will increase.

D. Consumers anticipate that the price of product B will be lower in the near future – Because consumers expect that the prices will decrease, there will be a decrease in the demand while the prices have not yet changed. When it does, there is a possibility of a shortage because consumers will be racing to buy product B,

E. The price of complementary product D falls – There will be an increase in demand because as an expectation being a determinant, the consumers would want to make the most out of the products decrease in price and “hoard” these materials for future use.

3. Assess the effects of the terrorist attacks of September 11, 2001 and the war on terrorism on the demand of the following items in the United States: airline tickets, gasoline, hotel rooms, books about Afghanistan and Arabic interpreters.

After the September 11 attacks, tourism in the United States decreased which lead to an economic crisis in their country thus leading hotels and infrastructures to lower their rates as well this included, airline tickets, hotel rooms and etc. The rise however, did occur in regards to gasoline, books and interpreters. Gas prices immediately shot up and suddenly people were interested in knowing everything they could about the Afghanistan attackers.