1.2 market Flashcards
Define supply
The quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period
What is the basic law of supply
Is that the price of products rises, businesses expand production to the market.
What does a supply curve show
The relationship between market price and how much a firm is willing and able to sell
What are the factors that can effect supply
Productivity
Indirect tax (VAT and Excise duty)(paid by producers for supplying
Number of firms
Technology
Subsidies (money paid by government to increase market supply)
Weather/external factors/war
Cost of production
Define demand
The quantity of a good or service that a consumer is willing and able to buy at a given price in a given time period
What is the basic law of demand
Demand varies inversely with price - lower prices make products more affordable for customers
What does the demand curve represent
The market price and the quantity demanded
Why does the supply curve slope upwards
Because as the market price increases producers will supply more to the market to increase revenue
What are the factors which effect demand
Population (demographics)
Advertising and marketing
Substitute goods (similar rival products)
Interest rates (cost of borrowing and reward for saving)
Fashion and trends
Income
Complementary goods (products which accompany each other)
What does the point where the supply curve and demand curve meet mean and represnt
Its the equilibrium which determines the most stable price
How does an increase in population in the oil market effect the supply and demand graph
Causes an increase in demand
How does an increase in the cost of production of cars effect the supply and demand market
Causes a decrease in supply
How does an increase in the price of wheat (complementary good) and a decrease in subsidies for bread effect the supply and demand graph
Causes a decrease in demand
Causes a decrease in supply
How does an increase in productivity for boats and a decrease in interest rates effect the supply and demand graph
An increase in supply
An increase in demand
How is an increase in supply shown on the graph
How is a decrease in supply shown on the graph
Inwards shift
Outwards shift
How is an increase in demand shown on the graph
How is a decrease in demand shown on the graph
Outwards shift of supply
Inwards shift of supply
Define Price Elasticity of demand
Measures the responsiveness of demand for a product to change its price
What is elastic demand
As the price changes demand changes drastically
What is inelastic demand
As the price changes the demand marginally changes
What is the formula for Price Elasticity of demand
% change in quantity demanded/ % change in price
How does a inelastic demand curve look
Why
Is a very steep line
Because a drastic change in price does not massively change the quantity demanded. An increase in price will increase revenue
Work out the price elasticity demand for :
a) price =£1 , QD= 100 units
b) price = £1.20 = 90 units
Is it elastic or inelastic
PED = % change in QD / % change in price
Price = £1 -> 1.20 = +20% QD = 100 units -> 90 units = -10%
= -10 / 20 = -0.5
Is inelastic as less than 1
Define price determination
Where equilibrium is reached and supply and demand are used to establish the general level of price
Define Income elasticity of demand (YED)
Measures the responsiveness of quantity demanded for a product following a change in income
What is the formula for income elasticity of demand
%change in Quantity Demanded / % change in real income
What is an inferior good
Means as income increases the quantity demanded decreases
E.g. Supermarket beans
What is a normal good
Means as income increases the demand increases
E.g. Cars
How can you tell whether the YED for a good is inferior or normal
YED of less than 0 is an Inferior good
YED of more than 0 is a normal good
Calculate the YED when :
2018 Income = £27,000 Qd= 100 units
2019 Income = £30,000 Qd = 95 units
Is it an inferior good or a normal good
YED = % Change in Qd / % Change in income
= -5%/ +11 % = -0.45
Less than 0 so is Inferior
Calculate the YED when :
2018 : Income = £30,000 Qd= 100 units
2019 : Income = £25,000 Qd = 85 units
Is it Inferior or normal
YED = % Change in Qd / % Change in income
= -15 / -16.6 = 0.9
More than 0 so is a normal good
What is the significance of Income elasticity of demand
Sales forecasting (can predict sales based on it)
Financial planning (YED changes can be factored into budgets)
Product portfolio management (reduce risk by having a wide range pf products)
