1.2 - Market

Question 1

What is demand?

Answer 1

The quantity that customers are willing and able to buy at a given price in a given period of time.

Question 2

How does price affect demand?

Answer 2

• The relationship between demand and price is INVERSE, as price decreases, demand increases and vice versa.
• Change in price will cause a movement along the demand curve

Question 3

What are normal and inferior goods?

Answer 3

• normal goods - goods for which demand will rise when income rises, most goods in the economy are normal goods e.g. cars, fancy restaurants
• inferior goods - goods for which demand will rise when income falls. E.g. public transport, fast food

Question 4

What is supply?

Answer 4

The amount of a product that suppliers make available to the market at any given price in a given period of time

Question 5

How does price affect supply?

Answer 5

• A rise in the market price brings about an expansion of supply - producers are responding to the profit motive
• a change in price may cause a movement along the supply curve

Question 6

What is the interaction between supply and demand?

Answer 6

• buyers agree on the price by purchasing the good/ service
• if they do not agree on the price then they do not purchase the good/ service
• based on this interaction, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties.
• at equilibrium price, the sellers will be satisfied with the rate/quantity of sales and buyers are satisfied that the product is good value for money

Question 7

What are non- price factors that affect demand?
Note: PASIFIC

Answer 7

P - population
A - advertising
S - substitutes price
I - income
F - fashion, trends and preferences
I - interest
C - complimentary goods

If any of these factors change then demand will change and will cause a SHIFT in the demand curve left or right. E.g. an increase in population will increase demand, which will shift the demand curve to the right.

Question 8

What non- price factors affect supply?
Note: PINTSWC

Answer 8

P - productivity *
I - indirect tax *
N - number of firms
T - technology *
S - subsidies *
W - weather
C - cost of production *

“*” = affect costs of production

Question 9

What is meant by elasticity?

Answer 9

The responsiveness of demand to a change in a relevant variable such as price or income

Question 10

What is meant by price elasticity of demand (PED)?

Answer 10

PED measures the extent to which the quantity of a product demanded is affected by a change in price

Question 11

What is the difference between inelastic and elastic?

Answer 11

• inelastic - demand does not change with price, insensitive to price changes. E.g. petrol
• elastic - demand does change with price, sensitive to price changes. E.g. a lower price = higher demand

Question 12

What are some examples of factors that affect PED?

Answer 12

• brand strength - products with a strong brand image tend to be price inelastic
• necessity - the more necessary a product is (e.g. water) the more the demand tends to be inelastic
• availability of substitutes - demand for products that have lot of alternatives tends to be price elastic

Question 13

What are the PED values?

Answer 13

If PED is calculated:
0 = perfectly inelastic
Less than 1 = inelastic
1 = unitary price elastic
More than 1 = elastic

Question 14

What is the formula for calculating PED?

Answer 14

PED = % change in quantity demanded / % change in price

Question 15

What is the relationship between PED and total revenue?

Answer 15

• inelastic goods - when price increases total revenue increases, when price decreases total revenue decreases.
• elastic goods - when price increases total revenue decreases, when price falls the total revenue increases

Question 16

What is meant by income elasticity of demand (YED)?

Answer 16

YED measures the extent to which the quantity of a product demanded is affected by a change in income

Question 17

What is the formula for YED?

Answer 17

YED = % change in quantity demanded / % change in income

• negative YED value = inferior good
• positive YED value = normal good

Question 18

What are some factors that influence YED values?

Answer 18

• during a recession wages fall and demand for inferior goods rises whilst demand for luxury goods falls
• during a period of economic growth and rising wages, demand for luxury goods increases while demand for inferior goods decreases
• other influences on income include: minimum wage legislation, taxation, increased international trade
• YED is also influenced by the nature of the good (luxury or inferior goods)

Question 19

How will an increase or decrease in the costs of production affect supply?

Answer 19

• if costs of production are lower, the business will be willing to supply more at the same price, as lower costs of production means the business can cover their total costs more easily. This will shift the supply curve to the right.
• if costs of production increase, the business will not want to supply more, as it will take more to cover their total costs, at the same price. This will shift the supply curve to the left.