1.2 Flashcards
Define demand
The quantity of a good that consumers are willing and able to purchase at a given price at a given time.
Define a substitute product
Define a complement product
A similar, rival prooduct that consumers may choose instead
A product whose use accompnies another
List 6 factors that will affect Demand for a product
Price= Increase price, decreases demmand.
Taste (chnages)
Income
Substitute prices
Complementary prices
Define supply
The quantity of product or service a business are willing and able to supply at a particular point of time
List 4 factors that will affect supply of a product
Changes in costs of production
Introduction of new tech
Indirect taxes (taxes the gov imposes on goods and services)
External shocks (unexpected events such as poor harvests that cause an increase in price of an item)
Celt
Cost of production
External shocks
Legislation
Tech
Define PED (price elasticity of demand)
A measure of the responsiveness of demand for a product to a change in price (what happens if a business changes it’s selling price)
How do you calculate PED
%change in demand/ %change in price
Defind YED (income elasity of demand)
Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income.
How do you calculate YED
%change in demand/ %change in real income
What goes on the Y axis of a demand curve graph
Price level
What goes on the X axis of a demand curve graph
Quantity
Define excess demand and excess supply
ED- Too much demand in relation to supply leads to a shortage
ES- Supply is greater than demand leads to a surplus
Define subsidies
A payment from the Government to aim to encourage production, boost exports, promote research, prevent a business from collapsing, or reduce unemployment. They are also introduced to make the price of a product more affordable to consumers.
What does a steep demand curve indicate a product is?
Price inelastic thus demand for the product is not responsive to a change in price.
What does a shallow demand curve indicate a product is?
Price elastic thus demand is responsive to a change in price.
What factors usually make a product inelastic?
Few substitutes, are necessities, and/or are addictive.
What are factors that influence PED?
Availablility of substitutes
Frequency of the purchase
Relative price/expense of a product
Whether the price is a necessity or luxury
Time (short run price changes have less effect than in the long run)
Brand strength
What pricing strategies are likely when a product is elastic or inelastic?
Elastic - Lowering pricing policies (competitive pricing)
Inelastic - Setting high prices (skimming)
Define unitary price elasticity
The value of PED = 1 and so change in demand = change in price
Define infinite/perfect elasticity
Extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all. In both cases, the supply and the demand curve are horizontal. (% change in price must =0)
Define an elastic product
Whole numbers. These products will have a significant change in demand for a product when the price is changed. Elastic products have substitutes.
Examples- Heinz soup, Daily Mail
Define inelastic product
A change in price causes a smaller percentage change in demand
Examples-
Petrol, Tap water, Cigarettes, Apple products
What does it mean if a products YED is greater than +1
Product is income elastic so sensitive to price changes in income hence luxury goods
What does it mean if YED is greater than 0 but less than 1
Product is income inelastic as incomes rise the product will see a small shift in demand hence necessity goods
What does it mean if the YED is less than 0
As income rise, demand shifts down for product thus making it an inferior good.
disadvantages of YED
Not all consumers are the same and have the same level of incomes therefore YED will change for different consumers’ income individually; as a result unless the target audience as a collective experience a change in income it might prove to be an ineffective measure.
Why do businesses need to know YED 3 reasons
Estimate sales- predict sales revenue
Develop a pricing policy- Knowing YED helps the firm decide whether to raise of lower price following a change in consumer incomes. If incomes are falling and YED is positive, a reduction in price might help cmpensate for the reduction in demand.
Diversification-
Firms can diversify and offer a range of goods with different YEDs to spread the risks associated with changes in the level of national income.
YED impact on business decisions
Businesses that sell goods with high income elasticity will be affected by the cyclical nature of the economy
In a recession, demand will fall significantly for products that have a high income elasticity
Businesses selling goods that have income inelastic demand are likely to find demand, and therefore sales, more stable during economic shifts
Regardless of whether a businesses goods are elastic or inelastic it should use economic factors to elp plan for changes in production. For example, a supermarket stocking luxury products with a high YED may switch to value brand with a lower YED or even inferior goods.
