1.2 Market Flashcards
What is market surplus??
Price increases -> Movement to right on supply curve -> Movement to left on demand curve -> Less quantity demanded than quantity supplied
How does price affect demand??
Increase in price = Less demand
Decrease in price = More demand
What is equilibrium in business??
Amount demanded = amount supplied
What is demand??
The quantity that customers are willing & able to buy at a given price in a given period of time
What are the 7 non-price factors that affect demand??
- Change in fashion & tastes
- Price of other goods
- Advertising & branding
- Changes to income
- Changing demographics
- External shocks
- Seasonality
What are the substitution and income effects??
Substitution: Fall in price = cheaper than substitutes (customers may switch to cheaper product if substitutes are close)
Income: More income = more purchasing power of customers
What is market shortage??
More demand than supply
How are price and supply related??
Price increases = quantity supplied increases
Price decreases = Quantity supplied decreases
Businesses want to maximise profits
What are the 6 non-price factors that affect supply??
- Costs of production
- Indirect taxes
- Subsidies
- New technology
- Weather conditions
- External shocks
What’s a subsidy??
Money given to a business by the government to help with costs & to encourage more production of a particular product
What happens to the supply curve when there is an increase in supply??
Curve shifts to the right
There’s a new equilibrium reached at a lower price because there’s now a market surplus (need to clear market of the excess supply)
What is elasticity of demand??
Measures the response of demand to a change in a relevant variable (price or income)
What does it mean for a product to be price elastic??
Change in demand is greater than change in price.
Often more for luxury products (e.g a 5% increase in price could cause a 15% decrease in demand)
What are the 6 factors that the PED depends on??
- Necessity
- Brand loyalty
- Substitutes
- Luxuries
- Habit
- Competition
What’s the equation for PED??
% change in quantity demanded/%change in price
(PED is always negative
