1.2 Market Flashcards
What is meant by demand?
Demand is the amount of goods and services a consumer is willing and able to purchase at a given price and in a given time period.
What is meant by effective demand?
This is demand that is backed up by an readiness to pay.
What factors affect demand?
Price
Price of substitutes
Price of complementary goods
Advertising and branding
Consumer incomes
Fashions, tastes and preferences
Demographics/population
external shocks
What is meant by a complementary good?
When two goods are generally purchased together. E.g. Petrol and Petrol car.
What is meant by a substitute good?
When one product can be bought instead of another e.g., cornflakes and Frosties.
What is meant by supply?
Supply is the amount of goods and services a supplier is willing and able to produce at a given price in a given time period.
What factors affect supply?
Changes to costs of production
Introduction of new technology
Subsidies
Indirect taxes
Number of firms in the market
External shocks
Why is the demand curve downward sloping?
There is an inverse relationship between price and quantity demanded.
Why is the supply curve upward sloping?
There is a positive relationship between price and quantity supplied. At a higher price there is more profit incentive for the firm to produce more.
What is meant by the market equilibrium price?
This is where demand and supply meet.
What is meant by a surplus in the market?
Where supply exceeds demand, usually because the price is too high.
What is meant by a shortage in the market?
Where demand exceeds supply, usually because of low prices.
Which way will demand shift, if there is an increase in demand?
Right
Which way will demand shift, if there is a decrease in demand?
Left
Which way will supply shift if there is an increase in supply?
Right
Which way will supply shift if there is a decrease in supply?
Left
What is meant by Price Elasticity of Demand (PED)?
The responsiveness of demand to a change in price.
How do you calculate PED?
Percentage change in quantity demanded/percentage change in price.
Why is PED Always negative?
There is an inverse relationship between price and quantity demanded.
What factors affect the PED?
Number of substitutes
Necessity or luxury
Addictiveness/habitual behavior
Frequency of purchase
Time
Percentage of income
If PED is below 1, what does this mean?
PED = Inelastic
If PED is above 1, what does this mean?
PED=Elastic
What is meant by inelastic PED?
It means that demand is not very responsive to a change in price.
What is meant by elastic PED?
Demand is very responsive to a change in price.
If PED is elastic, how will the pricing strategy of the firm change?
More likely to charge a lower price
-competitive pricing or penetration pricing
If PED is inelastic, how will the pricing strategy of the firm change?
More likely to charge a higher price
-price skimming
-cost plus pricing with large mark up.
What happens to revenue if PED is inelastic and the price rises?
A rise in revenue
What happens to revenue if PED is elastic and price rises?
A fall in revenue
What is meant by income elasticity of demand?
The responsiveness of demand to a change in income.
How do you calculate YED?
Percentage change in quantity demanded/ percentage change in income.
What factors influence the YED?
Luxury or necessity
Expectations of changing income e.g. loss of job, economic influences
If the YED is negative, what type of good will this be?
Inferior good
If the YED is positive, what type of good will this be?
Normal good
What is meant by an inferior good?
A good where as income increases, demand decreases and vice versa
What is meant by a normal good?
A good where as income increases, demand increases and vice versa.
