1.2 - Market Flashcards
What is demand?
Number of goods/service customers are willing to pay at a given price.
What are the factors leading to a change in demand? (non-profit factors)
-Change in the price of substitutes, new product at a better price
-Change in the price of complementary goods, e.g. if fuel prices rise, car demand falls
-Change in consumer incomes, demand for normal goods increases
-Fashions, tastes & preferences, increase in fashion means more demand
-Advertising & branding, increases brand awareness
-Demographics, large population increase of Nigerians
-Seasonality, heating bills are higher in winter
-External shocks, unexpected event Ukraine war or COVID.
What is supply?
Number of goods/services businesses are willing to sell
What are the factors affecting supply?
-Change in the costs of production
-New technology
-Indirect taxes
-External shocks
What is the calculation for price elasticity of demand?
PED = % change in quantity demanded / % change in price
What is price elasticity of demand
-PED measures how quantity demanded responds to a price change.
-If price ↑, demand ↓ / If price ↓, demand ↑
Which numerical values are inelastic or elastic
-those that are below 1 (0-1) are inelastic and are not sensitive to price change, e.g. necessities like bread and milk & addictive products like cigarettes.
-those that are above (1) are elastic as they are sensitive to price change, e.g. luxury products such as LV.
What are the factors that influence price elasticity of demand?
-luxury or necessity
-time
-brand loyalty
-available substitutes
-proportion of income spent
What is the significance of Price Elasticity of Demand (PED) to businesses in terms of pricing strategies?
PED helps businesses determine how price changes affect total revenue:
Price Inelastic Demand (PED 0-1):
Raising prices increases total revenue.
Lowering prices decreases total revenue.
Suitable for price skimming strategies.
Price Elastic Demand (PED 1 and above):
Raising prices decreases total revenue.
Lowering prices increases total revenue.
Suitable for competitive pricing strategies.
Understanding PED allows businesses to optimize pricing to maximize revenue.
What is income elasticity of demand (YED)?
YED reveals how responsive the change in quantity demanded is to a change in income.
What is the calculation for YED?
YED = % change of quantity demanded / % change in income
Which numerical values are inferior, necessity or luxury?
Luxury Goods (YED > 1):
Examples: Cars, smart watches, foreign holidays, cinema visits, jewelry, branded goods.
Demand rises when income rises and falls when income falls.
Demand is income elastic (responsive to income changes).
Necessity Goods (0 < YED < 1):
Examples: Staple food items (bread, milk, eggs, potatoes), fuel, toothpaste.
Demand is income inelastic (not very responsive to income changes).
Inferior Goods (YED < 0):
Examples: Public transport, domestic holidays, canned foods, unbranded/own-label goods.
Demand rises when income falls and falls when income rises (negative income elasticity).
What are the factors that influence YED?
-during a recession (inferior good demand rises)
-during economic growth (luxury good demand increases)
-introduction of minimum wage legislation
-increase/decrease in taxation
