Here is an example of an essay question along with one possible answer.
Question:
Explain the law of demand. Please provide a thorough answer that demonstrates your
understanding of this concept.
Answer:
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Definition of the law of demand
o Demand is a schedule or curve that shows the various amounts of a
product that consumers are willing and able to purchase at each of a series
of possible prices during a specified period of time.
The law of demand tells us that there is an inverse relationship between price and
quantity demanded. This is supported by the following three concepts:
Diminishing marginal utility which means consumption of successive units of a
particular product will yield less and less marginal utility.
o Marginal utility – the change in utility that results from a one-unit change
in the consumption of a good or service.
o The income effect - which means that a lower price increases the
purchasing power of the buyers money income allowing the buyer to
purchase more of the product than before.
o The substitution effect - which means that at a lower price buyers are
motivated to substitute what is now a less expensive product for similar
products that are now relatively more expensive.
The law of demand is graphically represented as a downward sloping curve.
An increase in demand is expressed graphically as a shift of the demand curve to
the right while a decrease in demand is expressed as a shift of the demand curve
to the left.
An increase or decrease in quantity demanded is represented as a movement alone
a given demand curve and is caused by an increase or decrease of the price of the
product.
A demand curve will shift as a result of a change in one of the determinants of
demand which are:
 Buyer tastes – a change in tastes can cause buyers to demand more, or less of
a product
 Number of buyers – an increase in the number of buyers will result in an
increase in the demand for a product
 Income –
a. If income increases and the demand for a good increases, that good is
called a normal good.
b. If income increases and the demand for a good decreases, that good is
called an inferior good
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Expectations – expectations of buyers will impact demand. If the buyer
expects the price of the product to increase, this would likely cause a decrease
in demand for the product.
Prices of related goods –
a. If the price of a good increases, we would expect the demand for the
substitute good to increase.
b. If the price of a good increases, we would expect the demand for its
complement to decrease.
Price of non-related goods – a price change for one good would have no
impact on the demand for the other good.