Question

4. Explain why a demand curve slopes downward.

5.   In each of the following examples, name the factor that affects demand and describe its impact on your demand for a new cell phone.    

a. You hear a rumor that a new and improved model of the phone you want is coming out next year.    

b. Your grandparents give you $500.    

c. A cellular network announces a holiday sale on a text-messaging package that includes the purchase of a new phone.    

d. A friend tells you how great his new cell phone is and suggests that you get one, too.

Answer 1

4)

Following are reasons for the downward sloping demand curve:

• When the price falls, the real income of consumers rises, so there will be a rise in demand for the good.
• When the price falls, the substitution effect makes the good relatively cheaper, hence, the demand for good rises.
• Alternative uses: at the lower price, goods can be used for many purposes, thus demand increases.

5)

a)

The consumer will postpone the demand for the future, thus the present demand for goodwill decline.

b)

After receiving money from grandparents, income rises, so the demand curve will shift right thereby increasing demand.

c)

Demand for cell phone will rise since new benefits are associated with newly purchased phones.

d)

Now new suggestion will incentivise us to purchase new phone, thus demand for cell phone will rise or demand curve will shift to right