1.2 - Market Flashcards
Demand
The amount society is willing and able to buy at a set price at a given time.
Inverse relationship between price (P) and quantity (Q) demanded, as one changes the other moves in the opposite direction.
Factors leading to a change in demand:
- Population
- Incomes
- Related goods - substitutes and complimentary goods
Advertising and branding
- Taste and preferences (e.g., gluten free)
- External shocks
- Seasonality
Related goods
Changes in the price of substitute and complementary goods will have a major impact on the quantity demanded of a product.
Incomes
As the income of consumers increases demand for some goods and services will increase and some decrease.
Demographics
Demographic factors are the statistical characteristics of the population, for example, age, gender, ethnicity and migration.
What are external shocks?
Factors beyond the control of businesses that can have an impact on the demand for products.
What is seasonality?
Refers to fluctuations in demand depending on the time of year.
What is advertising?
A promotional method that involves the use of media to communicate with existing and potential customers to generate awareness and desire for a product/service.
What is branding?
A promotional method that involves the creation of an identity for a business that distinguishes the firm and its products from competitors.
What is supply?
The amount of a good or service that producers are willing and able to sell at any given time.
What is supply?
The amount of a good or service that producers are willing and able to sell at any given price/time.
What are the factors leading to a change in supply?
Price, Technology, Indirect taxes, Production costs, Subsidies, External shocks.
What are production costs?
Costs directly linked to output, e.g., raw materials (AKA variable costs).
What are indirect taxes?
Taxation is a charge placed on individuals (income tax) or firms (corporation tax). Indirect taxes are placed on goods and services produced by individuals and firms.
What are subsidies?
Finance provided by the government to businesses in order to encourage suppliers to produce goods and services.
What are external shocks?
Factors that impact a company outside their control.
What does PED stand for?
Price Elasticity of Demand.
What is PED?
A measure of how responsive demand is to a change in price.
Formula: % change in quantity demanded / % change in price.
What factors influence PED?
- Branding
- Income
- Substitutes
- Nature of the product
- Time.
What is price elastic demand?
Price elastic demand means that a change in price will lead to a more than proportional change in demand, indicating that demand is sensitive to price changes.
What happens to sales revenue when the selling price increases in price elastic demand?
Increase selling price = decreased sales revenue.
What happens to sales revenue when the selling price decreases in price elastic demand?
Decrease selling price = increased sales revenue.
What is price inelastic demand?
Price inelastic demand means that a change in price will lead to a less than proportional change in demand.
What happens to sales revenue when the selling price increases in price inelastic demand?
Raise selling price = increased sales revenue.
What happens to sales revenue when the selling price decreases in price inelastic demand?
Lower selling price = decreased sales revenue.
