1.2 Market Flashcards
Demand definition
the quantities of a good/service that a consumer is willing and able to buy at given prices over a given period of time
Factor leading to change in demand
What are substitutes and complements?
Substitutes- the goods that can replace each other
Complements- the goods that are used together
Factor leading to change in demand
What are Normal and Inferior goods?
Normal-when consumer incomes increase the demand for these goods increases e.g. expensive cars
Inferior-whem consumer incomes increase the demand for these goods decrease e.g. supermarket own brand products
Factor leading to change in demand
Fashion, Tastes and Preferences
- when goods are prodced that meet current tastes and in fashion then demand increases & when preferences are met demand increases
Hunger Marketing- create scarcity for certain product to make people hungry
Factor leading to change in demand
Advertising & Branding
Demographics
External Shocks
Seasonality
-As demographics of country change so can demand for particular products
- External Shocks- events or circumstances beyond control of business that can have - effects, e.g pandemics, taxes
-Goods that have fluctuations in demand depending on time of year or events
Supply Definition
the quantities of a good or service that a seller is willing and able to sell at given prices over a given period of time.
Factor leading to change in supply
Cost of Production
Indirect Taxes
Cost of production—> when things become more expensive supply goes down due to reduced production. Cheaper= supply up
Indirect taxes—> tax on goods/services (burdens consumers) eg VAT
Increased tax raises cost of production & reduces supply. Uk standard VAT= 20%
Factor leading to change in supply
Introduction to new technology
New tech can drastically increase supply of goods to a market. New tech can lower cost of production making goods cheaper to produce.
Eg Tesla- increasing size of factory= lower cost of production
Factor leading to change in supply
Government Subsidies
External Shock
Government subsidies- financial assistance for businesses, leads to increases in supply by reducing cost of production. Eg. given to Green energy companies
External shocks- unforeseen events that disrupt supply chain or production. Shocks can be + or -
Common are : weather, labour strikes, change in governments
Interaction of supply and demand
- At equilibrium price buyers are satisfied that the product provides benefits worth paying
-If price is set above equilibrium, quantity supplied would be greater than the quantity demanded= surplus
-If price was set below equilibrium, quantity demanded would be greater than quantity supplied= shortage
What is PED ?
-Price elasticity of demand
-how much the price of something impacts the quantity demanded for a good/service
-helps business set right price
PED calculation
% change in quantity demanded / % change in price
(ignore minus signs)
Price elastic
If the absolute value of PED is greater than 1, the good is elastic, meaning a change in price causes greater change in demand.
Sensitive to price change
Price inelastic
If the absolute value of PED is less than 1, the good is inelastic, meaning a change in price results in a smaller change in demand
Not sensitive to price change
Factors influencing PED
Competition—> if comp and subs threat high then it means product is more elastic. If comp and subs threat little, demand doesn’t change
Time —> PED varies over time, shorter time= inelasticity (no immediate subs)
longer time = more elasticity
Branding —> strong branding increases customer loyalty, makes demand less elastic, e.g Apple
Proportion of income spent on product —> prop of income spent is key, if product is significant portion of consumers budget demand is more elastic
Significance of PED to business
- if product has elastic demand (PED>1) business may choose lower £ to stimulate demand and increase sales
- if product has inelastic demand (PED<1) business may consider raising £ as they won’t drop in sales, helping maximise revenue & profit margins
Relationship between PED & Revenue
ELASTIC : increased price=decreased revenue | decreased price =increased revenue
INELASTIC: increased price=increased revenue | decreased price=decreased revenue
What is YED ?
-Income elasticity of demand
-measures how sensitive the quantity demanded of a product is to changes in consumer income
-how income levels affect demand
YED Calculation
% change in demand / % change in income
Income elastic good
-Type of product which when demand increases significantly when consumer income increases
-As people’s income increases they tend to spend larger portions of income on these goods
E.g. first class cabins
Income inelastic good
- Type of product which when quantity demanded increases slightly when consumer incomes increases
-When incomes rise, demand for these goods increases by smaller %
E.g essentials: water, food, energy
Negative and Postive YED
NEGATIVE
- type of product for which quantity demanded decreases when consumer incomes increase= inferior goods (supermarket own)
between -0 - -1= inelastic
greater than -1= elastic
POSITIVE
-type of product for which quantity demanded increases when consumer incomes increase =normal goods (luxury)
between 0-1 = inelastic
greater that 1= elastic
Factors influencing YED
-Depending on whether the goods are necessities, luxuries and their price
(Price) higher proportion of expenditure to our income= more elastic
Significance of YED to business
Pricing strategies—> YED helps make informed decisions about pricing to maximise revenue and market share
Production Planning—> YED can be used for demand forecasting, businesses can adjust their production management following econ trends, eg when incomes are expected to rise they prepare for higher demand
Adaptation to econ trends—> businesses stay agile and adapt to trends. Can help prepare for shifts in demand
Risk management—> can asses vulnerability to downturns or income fluctuations. Can diversify product portfolio to inc both inelastic and elastic goods reducing risk
