1.2 market Flashcards
What is demand
The number of goods/services customers are willing to buy at a given price
What are 5 non price factors affecting demand
Price of other goods (compliments and substitutes)
Changes in tastes and fashion
Changing demographics
Advertising and branding
Changes to income
How does the price of compliments affect demand
Complimentary goods are consumed together. If one rises in price then the demand for the other one will decrease, as overall price increases. E.g. Printer and Ink
How does the price of substitutes affect demand
Substitute goods are replacement goods. Similar products sold by different businesses
How do changes in consumer incomes affect demand
As consumers income rises, demand for normal goods increase e.g. branded goods
If consumers income falls demand for inferior goods increase e.g. own label products
How do fashion tastes and preferences affect demand
If goods or services become more fashionable then demand for them increases.
And the opposite
How does advertising and branding affect demand
More money spent on advertising and branding = Increase in consumer awareness and brand loyalty
How does demographics affect demand
If the size or structure of a country’s population changes then demand for goods/services will too.
e.g. decrease in the number of babies born = decrease in demand for baby products
How can seasonality affect demand
Demand varies at different times of the year
for example during cold climates the demand for warm coats increases
How do external shocks affect demand
unexpected events can lead to a change in demand.
e.g. Outbreak of covid lead to increase in demand of toilet roll due to panic buying.
Increase in demand for face masks.,
Define supply
Supply is the number of goods/services businesses are willing to sell at a given price in a specific time period
What are 5 non price factors affecting supply
Changes in cost of production
New technology
External shocks
Indirect taxes
Government subsidies
How does changes in the costs of production affect supply
Increase in cost of production makes it more expensive to produce each unit of a good. This means that a business will be able to produce less at a given price
How does new technology affect supply
Advances in technology will lead to lower costs of production. This means business can produce more at a given price.
How do indirect taxes affect demand
If the government was to increase indirect taxes on businesses then the cost of production will increase as the firm has to pay extra costs.
This means the business can produce less at a given price
How do government subsidies affect demand
If a subsidy is given by the government to a business then it will reduce the costs of production
What is a subsidy
A subsidy is an amount of money paid to the firm by the government for each unit produced
How do external shocks affect supply
An unexpected event can affect supply
e.g. covid caused many hotels, bars and restaurants to close down. This decreases supply
What is a market
A market is any place that brings buyers and sellers together to trade at an agreed price
How is the market equilibrium met
Sellers will gradually adjust prices until their is a price and quantity that works for both parties
What does PED measure
How responsive the change in quantity demanded is to a change in price
What is the calculation for PED
%change in quantity demanded / % change in price
how do you workout % change
(new -old) / old
PED will always be negative. True or false
True
What does a numerical value of >1 mean for PED
The good is elastic.
Demand is more responsive to a change in price
e.g. luxury goods
What does a numerical value between 0 and 1 mean for PED
The good is inelastic
Demand is less responsive to a change in price
e.g. necessities and addictive products
What are five factors that affect PED
Availability of substitutes
Brand Loyalty
Proportion of income spent
Luxury or necessity
Time
How does brand loyalty affect PED
Consumers become loyal to the brand and will refuse to buy a competitors if it was cheaper.
e.g. coke consumers will choose to buy coke over pepsi even if its more expensive
How does the availability of substitutes affect PED
If there are few substitutes that then the PED will be low and price inelastic
Whereas, if there are more substitutes PED will be high and price elastic
How does proportion of income taken by the product affect PED
The smaller the proportion of income spent on a product the more price inelastic it will be
How does luxury or necessity affect PED
Necessities are requires as part of a consumers daily needs, therefore these are inelastic in demand
Luxuries are not essential and therefore are more price elastic
How does time affect PED
The longer the time period the more elastic the demand for a good or service is likely to be. (This is due to consumers having more time to search for substitutes.
And the opposite
Why is PED important for businesses
If the product is price inelastic, raising the price will lead to an increase in total rev. Whilst, lowering the price will lead to a fall in total rev
If the product is elastic, raising the price will lead to a fall in total revenue. Whilst, lowering the price will lead to a rise in total rev
What is YED
YED measures how responsive the quantity demanded is to a change in income
What is the formula for YED
% change in QD / % change in income
Is YED positive, negative or both
YED can be positive or negative
What does a positive YED mean
The good is considered to be a NORMAL GOOD
What does a negative YED mean
The good is considered to be an INFERIOR GOOD
What does the numerical value >1 mean for YED
The good is a luxury good
Income elastic- demand is responsive to a change in income.
Demand rises when income rises
What does the numerical value 0-1 mean for YED
The good is a necessity
Demand is not very responsive to a change in income
Income inelastic
What does the numerical value <0 mean for YED
The good is inferior
Demand rises when income falls
The good is negative income elastic
Why is understanding YED important for businesses
It helps them plan their production and products.
If a business can determine YED for its products it can predict changes income and either increase or decrease production
