1.2 - Market Flashcards
What is Demand?
Demand is the amount of a good that consumers are willing and able to buy at a given price.
What is the relationship between Price and Demand?
The higher the price, the lower the demand.
Which factors can influence demand?
o changes in the prices of substitutes and complementary goods
o changes in consumer incomes
o fashions, tastes and preferences
o advertising and branding
o demographics
o external shocks
o seasonality
How does the change in the price of substitutes and complementary goods lead to changes in demand?
If the price of a product’s substitutes or complementary goods increases, the demand for the product will decrease as it is less appealing to consumers.
How does the change in consumer income lead to changes in demand?
If income, demand will change depending on the type of product it is:
Inferior: If incomes increase, demand will fall as consumers can afford better products
Luxury: If incomes increase, demand will also increase as more people can afford to purchase the luxury
Normal: If incomes increase, demand will increase
How does the change in fashion, tastes, and preferences lead to changes in demand?
If consumer tastes change so that they like a product more, demand will increase, and vice versa.
How does the change in advertising and branding lead to changes in demand?
If a business advertises more/better, demand for their goods will increase, and vice versa.
However, if a competitor advertises more/better, demand for their products will fall as more people by the competitors.
How does the change in demographics lead to changes in demand?
Targeting certain market segments may increase demand if that segment, for example, has a high average income.
How do external shocks lead to changes in demand?
External factors such as a pandemic or a recession would lead to falling demand as consumers generally have less disposable income.
How does seasonality lead to changes in demand?
Seasonality will affect demand significantly for businesses which are season-related, such as a ski-resort or a Christmas Tree shop. For both of these examples, demand would fall drastically in the summer.
What does an inwards shift in the demand curve mean?
A decrease in demand.
What does an outwards shift in the demand curve mean?
An increase in demand.
What is the law of demand?
When the price increases, demand will decrease.
When the price decreases, demand will increase.
What is Supply?
The quantity of a good or service that a producer is willing to provide to the marketplace at different prices.
What is the relationship between Price and Supply?
The higher the price, the larger the quantity supplied, ceteris paribus.
What factors can influence supply?
o changes in the costs of production
o introduction of new technology
o indirect taxes
o government subsidies
o external shocks
What does an inwards shift in the supply curve mean?
A decrease in supply.
What does an outwards shift in the supply curve mean?
An increase in supply.
How does a change in the cost of production change supply?
If the cost of production increases, supply will likely decrease.
How does the introduction of new technology change supply?
If more efficient technology is introduced, supply will increase as it likely means production is quicker/more efficient.
How do indirect taxes change supply?
Indirect taxes increase costs so supply will decrease (and price would likely increase).
How do Government Subsidies lead to a change in supply?
A Subsidy would lead to a business having lower costs and so supply would increase as the business can afford to do so.
How do External Shocks lead to a change in supply?
An Economic Boom, for example, would lead to more supply as the business keeps up with increasing demand.
What is the significance of income elasticity of demand to businesses?
- Retailers use YED to plan sales, e.g., will sell more own brands in a recession
- As consumers’ incomes rise, businesses expect demand for normal goods to increase
- Producing a few inferior goods may protect a business from recession
What is the Market Equilibrium?
Equilibrium is the state in which supply and demand balance each other (where they meet on the curves), and as a result, prices become stable.
How do you calculate the Price Elasticity of Demand (PED)?
% change in Price
The interpretation of PED.
Perfectly Inelastic - 0
Relatively Inelastic - <1
Unit Elastic - 1
Relatively Elastic - >1
Perfectly Elastic - ∞
What factors influence price elasticity?
Elastic if:
* It is a luxury good
* There are many close substitutes
* The cost of switching is low
* Consumers have a low income
Inelastic if:
* It is a necessity
* There are few or no substitutes
* Brand loyalty is strong
* The product is addictive (e.g., Cigarettes)
How does Inelastic Demand affect Revenue?
With inelastic demand, revenue will be greater if the price increases - this is because consumers continue to buy the product.
How does Elastic Demand affect Revenue?
With elastic demand, revenue will be greater if the price falls - this is because a lower price significantly increases quantity demanded.
How do you calculate the Income Elasticity of Demand (YED)?
% change in Income
The interpretation of YED.
Elastic - > 1, Luxury Goods as an increase in income will cause an increase in quantity demanded
Inelastic - < 1, Inferior Goods / Normal Goods as an increase in income will cause a decrease in quantity demanded
What factors influence income elasticity?
- Type of Product (luxury, Normal, Inferior)
- Consumer Perceptions - Advertisement seen by consumers can encourage them to spend extra income on their products
