1.2 MARKET Flashcards
1.2.1 - Demand
What is demand?
For a product is the amount that buyers are willing and able to purchase at any given price, ceteris paribus
1.2.1 - Demand
How does changes in the prices of substitutes and complementary goods effect demand?
Changes in the price of substitute and complementary goods
- Will impact on the quantity demanded of a product
Substitute product acts as an alternative - creating competition
A complemnetary product is a bought longside a good or service
1.2.1 - Demand
How does changes in consumer incomes effect demand?
Necessities, don’t change
As the income of consumers increases demnad for some goods, and services will increase
# Luxuries, demand increases
# Inferior goods, demand decreases
1.2.1 - Demand
How does changes in fashion, taste and preferences effect demand?
People’s taste change over time and demand for fashionable products changes regularly
More fashionable = ^ demand
- Just as quickly, demand for taste and fashion can change
1.2.1 - Demand
How does changes in advertising and branding effect demand?
Promotional method that involves the use of media to communicate with existing and potential consumers
~ PURPOSE: Generate awareness
Branding distinguishes the firm and its products from competitors
~ Involves the creation of an identity for a business
Advertising and branding ^ if successfull
Bad reputation = decrease in demand
1.2.1 - Demand
How does changes in demographics effect demand?
Factors = Age, Gender, Ethnic mix
- Demographics influence the types of products demanded
e.g changing taste of a more diverse nation
different demands from an ageing population
1.2.1 - Demand
How does changes in external shocks effect demand?
- These are the unexpected events that are outside of the businesses control but have a direct impact on the level of demand
- External shocks could influence the demand for certain goods an services
1.2.1 - Demand
How does changes in seasonality effect demand?
This refers to fluctuations in demand depending upon the time of year
Seasonality exists because of:
- Change in weather
- Public holidays
1.2.2 - Supply
What is supply?
For a product is the amount that sellers are willing and able to sell at any given price, ceteris paribus
1.2.2 - Supply
How does changes in cost of production effect supply?
- COP are created by the price of factors inputs i.e. the factors of production
- If the costs of producing a good or service increases it will become more expensive to supply the products
–> will lead to some firms reducing outputs - The price of factors inputs can also be reduced making it cheaper to supply a product
–> There will be an ^ in supply - Improvemnets in technology can help to reduce costs of production
1.2.2 - Supply
How does introduction of new technology effect supply?
- Technological progress has meant that firms can produce in a more efficient and cost effective manner
- Improved large scale machinery allows them to spread fixed costs over greater outputs making the cost per unit produced cheaper
- As technology improved firms find it profitable to supply more products
1.2.2 - Supply
How does changes in indirect taxes effect supply?
- Taxation is a charge placed on individuals or firms; governments use taxation to finance their spending
- Indirect taxes are those placed on goods and services produced by individuals and firms
~ Value added tax ( VAT )
~ Duties - If indirect taxes are increased it becomes more expensive to produce a product
–> Therefore, the quantity supplied of that product will decrease
1.2.2 - Supply
How does changes in subsidies effect supply?
- Subsidies involve finance provided by the government to encourage suppliers to produce goods and services
- Subsidies will make it cheaper to produce a product
–> therefore, the quantity supplied of that product will increase - The withdrawal of subsidies will make it more expensive to produce a product
–> therefore, the quantity supplied of that product will decrease
1.2.4 - Price elasticity of demand
What is price elastic and inelastic?
ELASTIC = Demand means that a change in price will lead to a more than proportional change in demand
INELASTIC = Demand means that a change in price will lead to a less than proportional change in demand
1.2.4 - Price elasticity of demand
What is price elasticity of demand?
- Is a measure of how responsive demand is to a change in price
as price ^ demand decreases
as price decreases demand ^
1.2.4 - Price elasticity of demand
What is the PED calculation?
% change in quantity demanded / % change in price
1.2.4 - Price elasticity of demand
Example of PED question
A farm shop sells cabbages for £1.00. They currently sells 250 a week. The farmer raises the price to £1.25. Demand falls to 180 cabbages a week. What is the PED?
Percentage change in demad = -70/250 X 100
= -28%
Percentage change in price = £1.25- £1.00 = £0.25
= 0.25/£1.00 X 100
= 25%
PED = -28%/25
= -1.12
1.2.4 - Price elasticity of demand
How does availability of substitutes influence PED?
The closer the substitutes and the more that are available the higher the price elasticity of demand
1.2.4 - Price elasticity of demand
How does the price of competitors goods influence PED?
If the goods in competition with a product increase this will affect demand and price elasticity of demand
1.2.4 - Price elasticity of demand
How does branding influence PED?
Firm spend time and money building up their brand image. Be creating brand loyalty firms know that their customers willing to pay more for the product and they can therefore raise prices as the PED is lower
1.2.4 - Price elasticity of demand
How does income influence PED?
If the consumer incomes are higher then the issue of price becomes less important to the consumer and it is easier for films to raise price as the PED is lower.
1.2.4 - Price elasticity of demand
How does time influence PED?
The longer the time period the higher the price elasticity of demand. Given more time other firms have the ability to produce similar products and customers have more chance of adapting their buying habits
1.2.4 - Price elasticity of demand
How does nature of the good influence PED?
A luxery good will be price inelastic as demand will be mpre sensitive to changes in price
A necessity good will be price inelastic as demand will be less senstive to changes in price
1.2.4 - Price elasticity of demand
What is the significance of PED in terms of implications on price
Raising selling price - Price elastic demand - Sales revenue will increase
Rasing selling price - Price inelastic demand - sales revenue will increase
Lower selling price - Price elastic demand - Sales revenue will increase
Lower selling price - Price inelastic demand - Sales revenue will decrease
1.2.4 - Price elasticity of demand
What are the problems of forecasting PED?
The price elasticity of demand for product is constantly changing in a dynamic world
It is very difficult for firms to measure because:
- Difficulty in finding accurate information
- Price elasticity changes over different price ranges
- Taste and fashion are constantly changing
- Competitors don’t stand still
- Price elasticity will change over the period of the economic cycle
- They will continually improve existing products, bringing out new products and trying to promote their products
1.2.5 - Income elasticity of demand
What is income elasticity of demand?
Is a measure of the responsiveness of demand to a change in income
1.2.5 - Income elasticity of demand
What is the calculation for YED?
% change in quantity demanded/ % change in income
1.2.5 - Income elasticity of demand
How does levels of income of a consumer influence YED?
Poorer consumers tend to spend their income on necessaties
As they become wealthier the YED for necessities moves towards zero as consumers are satisfied with the amount of the product
- Normal goods that are necessities will have a lower positive YED coefficients
1.2.5 - Income elasticity of demand
How does standards of living influence YED?
Wealthier countries are likely to have consumer with higher disposable incomes
This means that they have greater spending power and are likely to use some of this greater income to buy luxury goods and services
1.2.5 - Income elasticity of demand
Factors of influencing YED - Notes
Whether the good is a necessity or a luxury
At higher standards of living increased consumer incomes see additional demand tend towards luxury goods as demand for neccessities is satisfied
