1)
What is the law of demand? What are the main factors that will cause the demand curve to shift? [2 marks]
The Law of Demand states that all else being equal, the quantity demanded of a good or service decreases as its price increases, and vice versa. In other words, there is an inverse relationship between the price of a product and the quantity consumers are willing to buy. Factors that can cause the demand curve to shift include:
Income: If the income of consumers increases, their purchasing power rises, leading to an increase in the demand for most goods (normal goods). For inferior goods, which are of lower quality, demand may decrease with rising income.
Price of Related Goods:
Substitute Goods: An increase in the price of one good may lead consumers to switch to a similar substitute, causing an increase in the demand for the substitute.
Complementary Goods: An increase in the price of one good may decrease the demand for its complementary good. For example, if the price of coffee increases, the demand for coffee filters might decrease.
Tastes and Preferences: Changes in consumer preferences or trends can cause shifts
in demand. If a product becomes more popular, the demand will increase, and if it becomes less desirable, the demand will decrease.
Population and Demographics: Changes in the size and composition of the population can affect demand. For instance, an aging population might increase demand for healthcare services.
Consumer Expectations: If consumers expect future prices to increase, they might buy more now, causing current demand to increase. Conversely, if they expect future prices to decrease, current demand might decrease.
Government Policies: Government actions such as taxes, subsidies, or regulations can impact demand. Subsidies can increase demand, while taxes or regulations can decrease it.
Seasonal Factors: Demand for certain goods can change based on the time of year. For instance, demand for winter clothing increases in the cold season.
Advertising and Marketing: Effective marketing campaigns can influence consumer preferences and stimulate demand for a product.
Each of these factors can lead to a shift of the entire demand curve either to the right (increase in demand) or to the left (decrease in demand).
