PRINCIPLES OF MICROECONOMICS
Chapter 4
1. What do economists assume when they are constructing models of demand? Why are
these assumptions necessary?
The model of demand carries with it various assumptions including;
i. The assumption that the consumer’s level of income does not change, as well as habits
and customs.
The relevance of this law is the fact that the level of demand goes up with a price
reduction; however, when we have an increase in the price, the level of demand will not go
down if we have an increase in the income of the consumer.
ii. Joint demand
Through this it’s evident that those goods of which their demand is joint in nature falsify
the same. For example, taking an example of two goods which are complimentary such as
demand for cars and petrol, when we have the cars demand going up then we shall
consequently have the petrol demand going up. However the law of demand dictates that
we shall only have the demand of petrol fluctuating on the price changes.
iii. Materials or items that are regarded of distinction.
Various goods are held by the consumer on their social distinction value. When we have
the price of these goods go up, then their demand will also go up as opposed to the model
of demand.
iv. Fear of Shortage in the future.
When we have a situation that the supply of certain goods in the future is uncertain, then
we shall have a panic-type demand whereby the consumers will start buying the good and
storing it for the use in future.
v. Ignorance.
This is the consumer’s lack of information whereby the consumer does not know the
previous price of the good and hence may be out there buying more of the good in terms of
quantity whereas in reality terms the price of the good has gone up.
vi. The fear of a future rise in the price of the good.
When we have a situation whereby the consumers fear that the price that is tagged to a
good will go up in the future due to a variety of reasons then one will be willing to
purchase more of the good presently hence resulting in an increase in the demand when the
price of the good has remained constant.
vii. The substitutes effect
When we have a price change of the substitutes then we shall have a change in the demand
of the good in the sense that when the price perhaps of a substitute goes down, then the
