1. The two circumstances that affect the demand for a good or service are:
- The willingness to purchase, which reflect as a desire, based on what economists classify as "tastes and preferences."
- The ability to purchase, directly associated with someone's income.
2. If we understand the demand curve as a relation between (strictly) two variables, quantity and price (on the X and Y axes respectively), the ceteris paribus assumption relates to the demand curve in the sense that, no other relevant economic factor rather than product's price are changing. In other words, all other variable remains constant except price.
3. A demand for a good is classified as elastic when an increase in prices causes a greater proportioned fall in demand.
For instance, if there is an increase in price, there will be a great impact on the quantity demanded (reducing it). This usually occurs on goods from which customer has the possibility to switch to another one of the same types if the price of the one consumed increases.
4. The opposite phenomenon applies to inelastic goods, an increase in prices causes a small proportioned fall in demand. In this case, if there is a price drop in a good, its demand won't be affected, since it is less sensitive to variations in price.
5. Three factors that determine a good's elasticity are:
- Availability of substitutes: small changes in prices, leads consumer to switch to another product of the same type,
- Income level: rich people pay less attention on price changes and are not affected by them, contrary to poor people, as a result, demand for lower income people is highly elastic.
- Habits: If a consumption of a good becomes a necessity, changes in prices will not affect a consumer willingness to purchase it. This situation is usual for addictive products.
