1.2 Flashcards
What is demand?
The amount of a product that consumers are willing and able to purchase at a given price. It affects the attractiveness of a market and the potential for sales.
What factors affect demand?
> Price of substitute products
Price of complementary products
Changes in consumer incomes
Fashion, tastes and preferences
advertising and branding
Demographics
External shocks
seasonality
What is supply?
The amount of a product that suppliers will offer to the market at a given price. The higher the price of a particular good or service the more that will be offered to the market.
What factors affect supply?
> Introduction of new technology making production process more efficient.
Changes in the cost of production, such as wages and raw materials.
External shocks
Indirect taxes
Government subsidies
What happens in the change of markets?
The price in a market is set where the wishes of consumers are matched exactly with those of producers.
What happens with changes in demand?
If demand increases, then prices will rise.
What happens with changes in supply?
If supply increases then prices will fall due to excess supply.
What is Price elasticity of demand?
-PED
-The responsiveness of quantity demanded in price.
What is the impact of PED?
-For some goods, a price change will result in a larger percentage change in the quantity demanded and for others a smaller percentage change in quantity demanded.
How do you calculate PED?
%Change in quantity demanded
———————————————
%Change in price
What happens when there is a price increase and you are price elastic?
-Leads to a bigger percentage decrease in quantity demanded. Revenues fall.
What happens when you are price elastic and there is a decrease?
-Leads to a bigger percentage increase in quantity demanded. Revenues rise.
What happens when you are price inelastic and prices increase?
Leads to a smaller percentage decrease in quantity demanded. Revenues rise.
What happens when you are price inelastic and there is a price decrease?
Leads to a smaller percentage increase in quantity demanded. Revenues fall.
What impact does PED have on decision making?
-Price inelastic: A business may be able to raise prices to increase revenue because of a smaller percentage change in quantity demanded.
-Price elastic: A business will have to think very carefully about any changes it makes to its pricing strategy.
What factors influence PED?
-Number of substitutes
-Relative efforts
-Extent to which the product is labelled a necessity
-Perceived value of the brand
What is income elasticity of demand?
-YED
-The responsiveness of demand to a change in income.
What are the two types of demand?
-Income elastic demand
-Income inelastic demand
What is income elastic demand?
Where a % change in incomes would lead to a proportionate or greater % change in the quantity demanded.
What is income inelastic demand?
where a % change in incomes will lead to a proportionately lower change in the quantity demanded.
What is the calculation for YED?
%Change in quantity demanded
———————————————
%Change in income
What impact does YED have on decision making?
Businesses that sell goods with high income elasticity will be affected by the cyclical nature of the economy.
Businesses that sell goods with income inelastic demand are likely to find demand, and therefore, sales are more stable during economic shifts.
What factors influence YED?
-Whether the product is considered a necessity
-whether the product is considered a luxury.
-the price relative to peoples incomes
