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Business Theme 1 > 1.2 Market > Flashcards

1.2 Market Flashcards

1
Q

What is demand?

A

The amount of a product that consumers are willing and able to purchase at any given price

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2
Q

What is demand concerned with?

A

What consumers are actually able to buy (what they can afford to and would buy), rather than what they would like to buy

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3
Q

Draw a demand curve

A
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4
Q

What does the demand curve show?

A

The quantity of a good or service that will be demanded at any given price

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5
Q

Which direction does the curve slope? Why?

A

Always downwards from left to right. This is because demand and price have an inverse relationship.

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6
Q

What happens to demand when price changes?

A

Price changes lead to an extension or contraction in quantity demanded

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7
Q

What factors lead to a change in demand?

A

• Price of substitutes
• Price of compliments
• Seasonality
• Demographics
• Fashion, taste and preference
• Changes in consumer income
• External shocks
• Advertise and brand

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8
Q

What does price of substitutes mean?

A

Many goods sold by businesses have substitutes, for example, Coca-Cola and Pepsi

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9
Q

How does this affect demand?

A

If the price of a substitute product falls, the quantity demanded for the substitute rises. As a result, the demand for the product would fall.

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10
Q

What does price of complements mean?

A

Consumers sometimes purchase certain goods together, for example cornflakes and milk

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11
Q

How does this affect demand?

A

If the price of a complement product falls, the quantity demanded for the product rises

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12
Q

What does changes in consumer income mean?

A

The amount of money people earn will influence the amount and type of goods they buy

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13
Q

How does this affect demand?

A

Generally when income increases, demand for goods will also rise. However, a minority of products see the inverse; Heinz will be bought over unbranded beans.

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14
Q

What does fashions, tastes and preferences mean?

A

Over a period of time, demand patterns change because of changes in consumer tastes and fashion. For example, the clothing industry is in strongly influenced.

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15
Q

How does this affect demand?

A

If a market is in decline, then demands for these goods and services will fall

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16
Q

What does advertising and branding mean?

A

Businesses try to influence demand for their products through advertising and other forms of promotion. For example, Sky spent £264 million on advertising.

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17
Q

How does this affect demand?

A

If goods are heavily advertised demand for them is likely to increase or investing heavily into branding can also increase demand

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18
Q

What does demographics mean?

A

These include age distribution, gender distribution, geographical distribution and ethnic groups. For example, with more people over 60, demand for care homes will increase.

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19
Q

How does this affect demand?

A

As population grows there will be an increase in demand for nearly all goods and services. However, demand is also affected by the structure of the population.

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20
Q

What does external shocks mean?

A

Factors beyond the control of the businesses can have an impact on the demand for products. For example, competition, economic climate etc.

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21
Q

How does this affect demand?

A

Depending on the external shock, they can either increase or decrease demand

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22
Q

What does seasonality mean?

A

Some goods and services have seasonal demand, so demand rises at particular times of year. For example, garden furniture in spring.

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23
Q

How does this affect demand?

A

In particular times of year, demand will have a significant peak but also have significant drops too

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24
Q

What is supply?

A

The amount of a product which suppliers will offer to the market at a given price. The higher the price of a particular good, the more that will be offering to the market.

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25
Q

Draw a supply curve

A
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26
Q

Which direction does the curve slope? Why?

A

Upwards - from left to right. This is because at higher prices a greater quantity will be supplied to the market and at lower prices less will be supplied.

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27
Q

What factors lead to a change in supply?

A

• Changes in costs of production
• Introduction of new technology
• Indirect taxes
• Government subsidies
• External shocks

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28
Q

What does changes in costs of production mean?

A

The supply of any products is influenced by the costs of production, such as wages, raw materials etc. Also the availability of resources will affect supply.

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29
Q

How does this affect supply?

A

If production costs rise, sellers sellers are likely to reduce supply. This is because their profits will be reduced.

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30
Q

What does introduction of new technology mean?

A

As new technology becomes available many businesses will start to use it in their production processes

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31
Q

How does this affect supply?

A

New technology is usually more efficient than older technology and will help to lower production costs, encouraging firms to offer more for sale

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32
Q

What does indirect taxes mean?

A

Indirect taxes are taxes imposed by the government on spending. Examples include VAT and excise duties.

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33
Q

How does this affect supply?

A

Indirect taxes represent a cost to firms, if they are reduced, supply will increase

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34
Q

What does government subsidies mean?

A

Sometimes the government may give money to businesses in the form of a grant. They may be given to encourage them to produce a particular product.

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35
Q

How does this affect supply?

A

If the government grants a subsidy on a good the effect is to increase its supply. This is because subsidies help to reduce production costs.

36
Q

What does external shocks mean?

A

Factors beyond the control of businesses can have an impact on the supply of products. Examples include world events, weather, government etc.

37
Q

How does this affect supply?

A

Supply changes depending on the shock. For example, good growing conditions will results in high crop yields and increased supply.

38
Q

What is the equilibrium price?

A

The price is set where the wishes of consumers are matched exactly with those of producers. Supply and demand are equal.

39
Q

Where is the equilibrium price on a graph?

A

The point where the supply line and demand line cross

40
Q

What is the equilibrium price also known as? Why?

A

The market clearing price, because the amount supplied in the market is completely bought up by consumers. There are no buyers left without goods and there are no sellers left with unsold stock.

41
Q

What is total revenue and how is it calculated?

A

The amount of money generated from the sale of output.
Total revenue = Price x Quantity

42
Q

What happens if demand increases?

A

Price will rise because producers react to rising consumer demand by putting up their prices. They can do this because customers are wanting the product in higher numbers.

43
Q

How does an increase in demand impact the demand curve?

A

An increase in demand for a product is shown by a shift in the demand curve to the right. This changes the equilibrium price because supply and demand are now equal at a different point.

44
Q

What happens if demand decreases?

A

The opposite would happen because producers are forced to lower prices, otherwise they’d be left with unsold stock

45
Q

How does a decrease in demand impact the demand curve?

A

The demand curve will shift to the left

46
Q

What happens if supply increases?

A

If supply increases the price will fall

47
Q

How does an increase in supply impact the demand curve?

A

A shift in the supply curve to the right. This changes equilibrium price because supply and demand are now equal at a different point.

48
Q

What happens if supply decreases?

A

The opposite would happen

49
Q

How does a decrease in supply impact the demand curve?

A

The supply curve would shift to the left, price would rise and the amount traded in the market would fall

50
Q

What is disequilibrium?

A

If the price in a particular market is not set at the point where supply and demand are equal

51
Q

What will happen if disequilibrium occurs?

A

• Excess demand
• Excess supply

52
Q

What does excess demand mean?

A

It occurs when price is below equilibrium. This means the demand exceeds the supply, so there will be a shortage of goods available.

53
Q

What does excess supply mean?

A

It occurs when price is above equilibrium. This means there is more supply of a product than demand to meet it, leading to unsold products.

54
Q

What is price elastic demand?

A

The relationship that exists between the responsiveness of demand and a change in price

55
Q

What is price inelastic demand?

A

If the demand for a product doesn’t change much compared with a change in price, then it is price inelastic

56
Q

What are examples of price inelastic goods?

A

A minority of goods are price inelastic, examples include petrol, diamond or water

57
Q

What is price elastic demand?

A

If the demand for a product changes a lot compared to a change in price, then it is price elastic

58
Q

What are examples of price elastic goods?

A

Most goods are price elastic, examples include certain foods, drinks or moisturisers

59
Q

How do you calculate price elasticity of demand?

A

Price Elasticity of Demand = % change in Quantity demanded / % change in Price

60
Q

How do you know if a good is inelastic using PED?

A

If the value of price elasticity is less than 1, demand is said to be price inelastic

61
Q

How do you know if a good is elasticated using PED?

A

If the value of price elasticity is greater than 1, demand is said to be price elastic

62
Q

What factors influence price elasticity of demand?

A

• Time
• Competition for the same product
• Branding
• The proportion of income spent on a product
• Product types vs the product of an individual business

63
Q

How does time impact PED?

A

PED tends to fall the longer the time period. This is mainly because consumers and businesses are more likely to turn to substitutes in the long term.

64
Q

How does competition for the same product impact PED?

A

Some businesses face highly price elastic demand for their products. This is because they are in very competitive markets, where their product is identical or a little different.

65
Q

How does branding impact PED?

A

The stronger the branding, the less substitutes are acceptable to customers. Successful branding therefore reduces the PED for the product.

66
Q

How does the proportion of income spent on a product impact PED?

A

For inexpensive products, where the proportion of a consumer’s income spent on the transaction is very small, demand is likely to be price inelastic. Vice versa.

67
Q

How does product types vs the product of an individual business impact PED?

A

Most products are made and sold by a number of different businesses. So the product could be price inelastic but the product of an individual business could be price elastic.

68
Q

How can you use PED for pricing?

A

For a minority of products demand is price inelastic. This means that if a business raises its price there there will be a less than proportionate fall in demand. Vice versa.

69
Q

What is the effect on total revenue when a price inelastic demand price drops?

A

Price Inelastic:
Price decrease = Total revenue decrease

70
Q

What is the effect on total revenue when a price inelastic demand price rises?

A

Price Inelastic:
Price increase = Total revenue increase

71
Q

What is the effect on total revenue when a price elastic demand price drops?

A

Price Elastic:
Price decrease = Total revenue increase

72
Q

What is the effect on total revenue when a price elastic demand price rises?

A

Price Elastic:
Price increase = Total revenue decrease

73
Q

What is income elasticity of demand (YED)?

A

Measures the responsiveness of demand to a change in income

74
Q

How is a product income elastic?

A

If incomes rise by 10% and demand rises by 25%, the change in demand is proportionately greater than the change in income

75
Q

What are examples of income elastic products?

A
  • Cars
  • Fashion accessories
  • Entertainment
76
Q

How is a product income inelastic?

A

If income rises by 10% and demand only rose by 5%, the percentage change in demand is proportionately less than the percentage change in income

77
Q

What are examples of income inelastic products?

A
  • Essential goods
  • Food
  • Heating fuel
78
Q

How do you calculate income elasticity of demand?

A

Income elasticity of demand = % change in quantity demanded / % change in income

79
Q

What does it mean when income elasticity is 1<?

A

Demand is said to be income elastic. This means that the change in demand is proportionately greater than the change in income.

80
Q

What does it mean when income elasticity is 1>?

A

Demand is said to be income inelastic. This means that the change in demand is proportionately less than the change in income.

81
Q

What does it mean when income elasticity is positive?

A

For normal goods, where an increase in income results in an increase in demand, the value will be positive

82
Q

What does it mean when income elasticity is negative?

A

For inferior goods, where an increase in income results in a decrease in demand, the value will be negative

83
Q

What is the main factor affecting income elasticity of demand?

A

Whether or not goods are necessities or luxuries

84
Q

What are necessities?

A

Basic goods that consumers need to buy, examples include food, electricity and water. Demand for these types of goods will be income inelastic.

85
Q

What are luxuries?

A

Goods that consumers like to buy if they can afford them, examples include air travel, fashion accessories and satellite TV. Demand for these types of goods will be income elastic.

Business Theme 1 (6 decks)

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