Chapter 7.1, Problem 1R

To determine

To analyse: The meaning of supply, demand, voluntary exchange, law of demand, real income effect, quantity demanded, utility, substitution effect, marginal utility and the law of diminishing utility.

Explanation of Solution

Demand: Demand is an economic concept which refers to the desire of a consumer to buy commodities and services and the eagerness to pay a price for a particular commodity or service.

The study of demand is important to business enterprises. For business decision-making, they are the source of several valuable perspectives. The success of a company's failure depends primarily on its ability to produce resources by fulfilling customer demand.

Supply: Supply is a basic economic term that describes the total quantity available to consumers of a specific commodity or service.

Customers demand the delivery of goods efficiently and on schedule time. The significance of the supply strategy is that customer satisfaction is improved by this process and help producers to produce according to market demand.

Market: A market is a place where to facilitate the sale or purchase of commodities and services, buyers and sellers may interact.

The market is very significant for the economy because it helps consumers to purchase whatever they want and producers to sell their products so that they can earn a higher return by fulfilling consumer demand.

Voluntary exchange: The act of sellers and buyers participating in market transactions in mutual trade, which, according to the advocates of the term, occurs freely and voluntarily.

This is a significant part of a balanced economy. If people in a market economy do not believe that the trade would help them, they will not be able to make it happen which will lead to a market failure and lower growth.

Law of demand: The law of demand says that how the amount bought varies from price to price. Or it can be said that the greater the price of a commodity or service, the fewer the quantity demanded.

The law of demand is significant because it helps in fixing the price of commodities and services in the economy.

Quantity demanded: The quantity demanded is a phrase used in economics to explain the total quantity of a commodity or service requested by customers for a specified period of time. It depends on the marketplace of commodity or service whether the market is in equilibrium or not.

Quantity demanded helps the producer to know the overall demand for a particular produced so that they can fulfil it.

Real income effect: A change in demand for a commodity or service triggered by a change in the buying power of a customer resulting from a shift in real income is the real income effect.

The change in real income leads to a change in the nominal income due to which the price in the economy and exchange rate gets affected. These variables have a direct effect on trade and hence, on the overall growth of the economy.

Substitution effect: The Substitution effect is the reduction in sales of a commodity as its price rises due to customers moving to cheaper alternatives.

It helps to understand the amount by which one commodity is substituted by another so that the policymakers as well as producers can work accordingly.

Utility: In economics, the utility is a concept that refers to the overall happiness obtained from consuming a product or service. It is necessary to consider the economic usefulness of a commodity or service since it directly affects the demand and thus the price of that good or service.

It is necessary to consider the utility of a good or service, since it directly affects the demand for the commodities and services, and thus the price, of that good or service.

Marginal utility: The added satisfaction that a customer gets from having one more unit of a commodity or service is marginal utility.

Economists use the principle of marginal utility to assess how much of an item consumers are willing to buy.

Law of diminishing marginal utility: As a person starts a commodity, the law of decreasing marginal utility gives an explanation that the utility or satisfaction that they obtain from the commodity falls as they start consuming more and more of that product. A person might, for instance, buy a certain amount of chocolate for a while. Soon, he/she may buy less and instead select another chocolate or purchase cookies because the satisfaction they originally got from the chocolate is decreasing.

To describe other economic incidents like time preference, the law of decreasing marginal utility is used.