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Business > 1.2 revision (demand/supply) > Flashcards

1.2 revision (demand/supply) Flashcards

1
Q

What is demand?

A

Demand is the quantity consumers are
willing and able to buy at a stated
price

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2
Q

Law of demand

A

As price increases, quantity demanded decreases and if price decreases, quantity demanded increases

At low demand and high supply, due to a surplus prices fall (they want to sell off the stock), At high demand and low supply, due to a shortage of goods prices rise.

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3
Q

Demand curve

A

The demand curve slopes downwards from left to right (negative slope).

There’s always an inverse (change in the opposite way in relation to something else) relationship between price and quantity demanded.

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4
Q

What is supply?

A

The amount that sellers are willing
and able to supply and sell at a given price

The higher the price of a particular good and
service, the more that will be offered to the
market.

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5
Q

Suppliers

A

Businesses that provide resources (eg, raw materials)

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6
Q

PED

A

Price Elasticity of Demand
The responsiveness of quantity in relation to a change in price

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7
Q

YED

A

Income Elasticity of Demand
The responsiveness of quantity demanded in relation to a change in income

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8
Q

Factor affecting demand

A

Changes in taste, fashion, trends

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9
Q

Other factors affecting demand

A

Income, complementary goods, price of substitutes, competitors, advertising and branding, demographics, external shocks, seasonal demand,

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10
Q

Movement on demand and supply curve

A

A price change will cause a movement along the curve

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11
Q

Shift in demand

A

Changes in any of the factors other than price causes the demand curve to shift either:
Left (Less demanded at each price)
or
Right (More demanded at each price)

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12
Q

Movement - Contraction along demand curve

A

Up the curve
Fall in the quantity demanded caused by rises in prices.

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13
Q

Movement - Extension along demand curve

A

Down the curve
Increases in demand caused by a fall in prices.

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14
Q

Supply curve

A

This has a positive
slope because at
higher prices a
greater quantity will
be supplied to the
market and at a lower
price less will be
supplied.

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15
Q

Why does it slope upwards?

A

The profit motive: When the market price rises following an increase in
demand, it becomes more profitable for businesses to increase their output.

Production and costs: When output expands, a firm’s production costs tend to
rise, therefore a higher price is needed to cover these extra costs of
production.

New entrants coming into the market: Higher prices may create an incentive
for other businesses to enter the market leading to an increase in total supply.

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16
Q

Movement - Contraction along the supply curve

A

Down the curve

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17
Q

Movement - Extension along the supply curve

A

Up the curve

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18
Q

Shifts in supply

A

Left - A reduction in supply
or
Right - An increase in supply

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19
Q

Factors affecting supply

A

Changes in the cost of production, Government subsidies, New technology, Indirect taxes, External shocks

20
Q

Interaction of supply and demand

A
21
Q

Interaction of supply and demand
Equilibrium price

A

In any market the price is set where the wishes of consumers are
matched exactly with those of producers/supply. This is known as the
equilibrium price- where supply and demand are equal.

The equilibrium price is also known as the market clearing price
because the amount supplied is all bought up by the consumers. No
buyers left without goods and no sellers left with unsold goods. THE
MARKET IS CLEARED.

22
Q

Key terms:
Free market
Ceteris paribus

A

Free market: where prices of goods and
services are determined by supply and
demand

Ceteris paribus: when other conditions
remain the same

23
Q

Market forces can cause changes in the
price of an item. Example?

A

For example if there is poor weather and
there are few strawberries, the price will go
UP per batch as they are rarer and
demand has not changed.
If there is a good summer and lots of new
farms produce strawberries there will be a
great supply, they will be in every shop and
so price will go DOWN

24
Q

Supply is affected by demand. Changes in demand can cause…

A

If demand increases, suppliers will put their prices high in order to make profit, as there is rising demand. Therefore prices will increase for
customers.
If demand were to fall, the opposite would happen, suppliers will be forced to lower their prices. If not they would be left with surplus and unsold stock.

25
Q

Changes in supply and demand together
Shift

A

If there is an increase in demand
there will be a shift to the right,
however, if there was a decrease
in supply it will shift to the left.
Therefore, causing there to be a
new equilibrium price.

If something happens to disrupt that
equilibrium (e.g. an increase in demand
or a decrease in supply) then the forces
of demand and supply respond (and
price changes) until a new equilibrium

26
Q

Disequilibrium in the market

A

This happens when price in a particular market is not set at the point where supply and demand are equal. The two situations this happens at are:
Excess demand
Excess supply

27
Q

Excess demand

A

This is the position where demand is greater than supply at a given price and there are shortage of goods in the market.

28
Q

Excess supply

A

This is the position where supply is greater than demand at a given price and there are unsold goods in the market.

29
Q

Key terms:
Shortage
Surplus

A

Shortage - too little/ running out
Surplus - too much/excessive

30
Q

PED formula

A

% change in quantity demanded/% change in price

Q before P

31
Q

Key terms:
Inelastic
Elastic

A

If the demand for a product doesn’t change much with a change in price:
PRICE INELASTIC
Demand is relatively unresponsive to the change in price - customers don not react to the change by buying more/less, they buy similar amounts

If the demand for a product changes a lot with a change in price:
PRICE ELASTIC
Demand is relatively responsive to the change in price - customers react to the change by buying more/less

32
Q

Examples of inelastic and elastic goods

A

Inelastic - Petrol, iPhone
Elastic - necessities such as chocolate, tissues, bread (they can be replaced by substitutes)

33
Q

PED meaning from calculations

A

If PED is between 0 and -1 then demand is
inelastic. If PED is more than -1, then demand is
elastic.

Eg - A price elasticity of -2 means that for every 1% increase in price, there is 2%
decrease in demand

34
Q

If PED = 1

A

A unitary elastic good has a change in
demand which is equal to the change in
price. E.g. 10% change in price leads to a
10% change in demand

35
Q

Factors affecting PED

A

Substitutes
Percentage of income
Luxury/necessity
Addictive
Time period
(SPLAT)

36
Q

Factors affecting PED

A

Substitutes – the more subs there are, the more
elastic PED would be
Percentage of income – if the good takes a
huge chunk of my income, then PED will be
more elastic e.g. 10% increase of a price of a car
and apple
Luxury/necessity – luxury are more elastic,
necessity will be elastic
Addictive – the more addictive, the more
inelastic
Time period – in the short term, PED for a good
could be more elastic as there may be less subs,
but in the long run, more subs might be available

37
Q

How does PED help businesses?

A
  • It informs their decision making about pricing of goods and services
  • It helps them identify how effective sales are
  • How large a reduction in price of a product is required to increase sales
38
Q

YED formula

A

% change in quantity demanded/% change in income

39
Q

YED meaning from calculations

A

If YED is between 0 and 1 then demand is
inelastic. If YED is more than 1, then demand is
elastic

40
Q

Key term:
Inferior good

A

Inferior good (an item that is often a substitute product whose demand drops when people’s income increases).
Demand is negatively related to a change in income. This is an unusual case where demand for a good falls as income rises. This occurs with inferior goods.
e.g. a 10% increase in income causes a 10% fall in Primark
clothes.

41
Q

Key term:
Normal good

A

A normal good is a good that experiences an
increase in demand due to an increase in a consumer’s income
Demand is positively related to a change in income. Demand for a good rises as income rises. There are two subcategories of normal
goods:
Luxury
Necessity

42
Q

Luxury good - factor that affects YED

A

Demand is responsive to a change in income. A change in income results in a proportionately larger change in quantity demanded. Demand is income elastic.

43
Q

Necessity good - factor that affects YED

A

Demand is unresponsive to a change in income. A change in income results in a proportionately smaller change in quantity demanded. Demand is income inelastic.

44
Q

YED meaning from calculations

A

If figure is + then it is a normal good

If figure is – then it is an inferior good

45
Q

If YED = 0

A

A unitary elastic good has a change in demand
which is equal to the change in income. E.g. 10%
change in income leads to a 10% change in
demand

46
Q

How does YED help businesses?

A
  • As consumers’ incomes rise businesses want to produce normal goods
  • Producing a few inferior goods may protect a business from recession
  • Retailers use knowledge of YED to plan sales and sell own brand goods in a recession

Business (2 decks)

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