1.2 - market (supply and demand)

Question 1

factors leading to a change in demand

Answer 1

• changes in the prices of substitutes and complementary goods
• changes in consumer goods
• changes in consumer incomes
• fashions, tastes and preferences
• advertising and branding
• demographics
• external shocks
• seasonality

Question 2

factors leading to a change in supply

Answer 2

• changes in the costs of production
• introduction of new technology
• indirect taxes
• government subsidies
• external shocks

Question 3

how to draw a demand diagram

Answer 3

• price on y-axis
• quantity on x-axis
• negative line

Question 4

how to draw a supply diagram

Answer 4

• price on y-axis
• quantity on x-axis
• positive line

Question 5

how to show a shift in demand on a demand diagram

Answer 5

• increase - moves to the right
• decrease - moves to the left

Question 6

how to show a shift in supply on a supply diagram

Answer 6

• increase - moves to the right
• decrease - moves to the left

Question 7

calculation for price elasticity of demand (PED)

Answer 7

% change in demand / % change in price

Question 8

price elasticity when a product is inelastic

Answer 8

between 0 and -1

Question 9

price elasticity when a product is elastic

Answer 9

a negative number greater than 1

Question 10

what is means when a product is inelastic

Answer 10

changes in price have a proportionately smaller effect on demand/sales

Question 11

what it means when a product is elastic

Answer 11

changes in price have a proportionately larger effect on demand/sales

Question 12

effect on revenue when the product is elastic

Answer 12

increasing price - revenue falls
decreasing price - revenue increases

Question 13

effect on revenue when the product is inelastic

Answer 13

increasing price - revenue increases
decreasing price - revenue falls

Question 14

factors influencing price elasticity

Answer 14

• degree of product differentiation
• availability of direct substitutes
• branding and brand loyalty

Question 15

the significance of price elasticity

Answer 15

• price elasticity can help in forecasting sales
• it can help to decide on the best pricing strategy for increasing revenue

Question 16

calculation for income elasticity of demand (YED)

Answer 16

% change in demand / % change in real incomes

Question 16

three types of income elasticity

Answer 16

• inferior good - negative income elasticity
• normal good - income elasticity between 0 and 1
• luxury good - income elasticity of more than 1

Question 17

effect of change in income on an inferior good

Answer 17

• increase in income - decrease in demand
• decrease in income - increase in demand

Question 18

effect of change in income on a normal good

Answer 18

• increase in income - increase at the same rate as income or a little slower
• decrease in income - decrease at the same rate as income or a little slower

Question 19

effect of change in income on a luxury good

Answer 19

• increase in income - increases at a faster rate than real incomes
• decrease in income - decreases at a faster rate than real incomes

Question 19

factors affecting income elasticity

Answer 19

• necessities vs indulgences
• who buys the product

Question 20

the significance of income elasticity

Answer 20

• sales forecasting
• financial planning
• product portfolio management