1.2 The Market Flashcards

1
Q

What is demand

A

the level of interest customers have in a product

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2
Q

How does price effect demand

A
  • higher the price the lower effective demand (due to fewer customers wanting to pay high price)
  • lower prices can affect demand as it may damage consumer perception of quality
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3
Q

What is a subsitute product

A

similar, rival product that consumers may choose instead

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4
Q

What is a complement product

A

a product whose use accompanies another, so petrol is a complementary product to cars

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5
Q

Explain the relationship between demand for a product and the price of its complements

A
  • if price of complementary product rises- demand for original product falls
  • e.g if price of petrol falls- demand for cars increases
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6
Q

How does change in consumer incomes affect demand

  • what happens if income levels rise what happens to demand
  • what happens when economies go through recession
  • when do inferior goods see demand rise
  • when do inferior goods fall in demand
A
  • if income levels rise demand for normal goods rise- consumers have more income to spend
  • however when economies go through recession- incomes fall- normal and luxury goods demand falls- consumers try to save money
  • inferior goods see demand rise when incomes fall- to save money (e.g poundland)
  • when incomes rise again consumers switch back to normal, luxury goods- fall in demand for inferior goods
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7
Q

Name 5 factors that affect demand- positively and negatively

A
  • tastes and preferences- unpredictable changes- can positively and negatively affect demand
  • advertising- lead to major short-term increase in demand
  • demographics- changes in population- affect demand for individual products
  • external shocks- (natural disasters, global pandemic) - hugely impact demand- unpredictable
  • seasonality- affects demand (e.g weather- strawberries, XMAS)
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8
Q

How does supply have an effect on the profit a company makes

A

-the more a firm supplies, the more profit they will make

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9
Q

How does cost of production of a product affect supply

A
  • if production costs rise, amount supplied will fall

- if production costs fall, amount supplied will rise

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10
Q

How does the introduction of technology within a business affect supply

A

-introduction of technology will lead to an increase in supply as

  • lower production costs
  • which offer higher profits
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11
Q

How does indirect taxes affect supply

A
  • increase in indirect tax- increases costs- reduces supply

- decrease in indirect tax- cuts total costs- increases supply

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12
Q

What are indirect taxes

A

-taxes the government imposes on goods and service (VAT)

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13
Q

How do government subsidies affect supply

A

-cuts cost of production- subsidies increase supply

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14
Q

What are government subsidies

A
  • opposite to tax
  • occur when government wants to increase supply of a product (wind-powered energy)
  • so offers subsidies to business
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15
Q

How do external shocks affect supply

A

-natural disasters reduce total quantity of item avaliable- price of item increases- production costs rise- reducing amount they are willing to supply

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16
Q

What happens if demand is higher than supply

A
  • price of product will rise

- until demand falls abck to level of supply

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17
Q

What happens if supply is higher than demand

A
  • price will fall

- stimulating more demand so product is sold

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18
Q

What is equilibrium in business

A

situation in a market where supply and demand are balanced- so price is stable

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19
Q

What are commodity markets

A
  • markets for undifferentiated products

- e.g. raw materials

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20
Q

How can you work out equilibrium on a supply and demand graph

A

-equilibrium is where the supply line and demand line cross

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21
Q

What will occur to the price if -demand curve moves to the right (rises)

A

price goes up

-businesses can make additional profit- high demand- increasing price

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22
Q

What will occur to the price if demand curve moves to the left (falls)

A

price goes down

-entice customers in- lower price- hope to raise demand

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23
Q

What will occur to the price if -supply curve moves to the left (falls)

A

price goes up

-reduce demand to meet supply

24
Q

What will occur to the price if -supply curve moves to the right (rises)

A

price goes down

25
Q

What is price elasticity of demand

A

measures responsiveness of demand for a product to change its price

26
Q

What is the formula for price elasticity of demand

A

% change in quantity demanded/ % change in price

27
Q

what occurs if the product is price elastic and the price increases

A
  • price increases
  • revenue falls
  • as small increase in price leads to fall in demand
28
Q

what occurs if the product is price elastic and the price decrease

  • effect on revenue
  • explain
A
  • revenue increases

- as small cut in price leads to large increase in demand

29
Q

what occurs if the product is price inelastic and the price increases

  • effect on revenue
  • explain
A
  • increases revenue

- as an increase in price leads to a small fall in demand

30
Q

what occurs if the product is price inelastic and the price decreases

  • effect on revenue
  • explain
A
  • revenue falls

- as price cut causes small increase in demand

31
Q

What does it mean if price elasticity is more than 1

A

price elastic

change in demand is more than change in price

32
Q

What does it mean if price elasticity is less than 1

A

price inelastic

change in demand is less than change in price

33
Q

name 3 factors that influence price elasticity

A
  • degree of product differentiation
  • availability of direct substitutes
  • branding and brand loyalty
34
Q

Name 2 significant reasons of price elasticity

A
  • help in forecasting sales- by considering impact of planned future price changes
  • can help to decide on the best pricing strategy for increasing revenue
35
Q

Name 2 reasons why price elasticity values change over time

A
  • competitive markets firms affect extent products stand out from rivals
  • unpredictability- undermine usefulness of price elasticity - hard to rlly know current price elasticity until after price has been changed and the effect on demand measured
36
Q

how do you calculate income elasticity of demand

A

% change in demand/ % change in real incomes

37
Q

Do inferior goods have a positive/ negative income elasticity

A

negative income elasticity

38
Q

Do normal goods have a positive/ negative income elasticity

A

positive income elasticity

39
Q

Do luxury goods have a positive/ negative income elasticity

A

positive income elasticity

40
Q

What happens to inferior goods if

  • changes in real income increase
  • changes in real income decrease
A
  • if real incomes increase- demand decreases- consumers stop buying cheaper goods- have more money
  • if real incomes decrease- demand increases- consumers switch to these products to save money as their incomes fall
41
Q

What happens to normal goods if

  • changes in real income increases
  • changes in real income decreases
A
  • if real income increases- demand increases at same rate- affluent customers able to buy more of this product now
  • if real income decreases- decrease at same rate- if consumers tighten their belts- cut back on these products
42
Q

What happens to luxury goods if

  • changes in real income increases
  • changes in real income decreases
A
  • if real income increases- increase at faster rate than real incomes- extra income will be spent on these products
  • if real incomes decrease at a faster rate than real incomes- first products to disappear from customers shopping baskets when they feel they need to tighten their belts
43
Q

Name the 2 factors that affect income elasticity

A
  • indulgences- things we treat ourselves with when we can afford it-more sensitive t changes in income
  • necessities- basic items we always expect to buy
44
Q

Name 3 significant factors of income elasticity

A
  • sales forecasting- knowledge of reaction of product to change in real incomes allows business to forecast sales
  • financial planning- sales forecasts can be factored into budgets and financial plans- prevents supplying too much/ little of a product
  • product portfolio management- ensure product portfolios contain products with a range of income elasticities- to prevent critical impact on sales if changes in real income occur
45
Q

What does it mean if a product is price elastic

A

changes in price have larger effect on demand/ sales

46
Q

What does it mean if a product is price inelastic

A

changes in price have smaller effect on demand/ sales

47
Q

What does elasticity measure

A

responsiveness of demand to a change in a relevant variable – such as price or income​

48
Q

What is unitary price elasticity

A

when PED is exactly 1

-change in demand = change in price

49
Q

Definition of income elasticity of demand

A

measures extent to which quanitity of product is affected by a change in income

50
Q

Name 6 non-price factors affecting demand

A

-seasonality

-external shocks

-changes in fashion & tastes

-price of substitutes

-advertising & branding

-changes to income

51
Q

What is supply

A

number of goods businesses are willing to sell at a given price

52
Q

Why is there an inverse relationship between the quantity demanded and the price

A

-as price ^ quantity demanded decreases

-as price decreases quantity demanded ^

53
Q

Why is there a direct relationship between supply and price

A

-as when price ^ -> supply ^

-when price decreases -> supply decreases

54
Q

Name 5 non-price factors affecting supply

A

-changes in cost of production

-external shocks

-new technology

-indirect taxes

-government subsides

55
Q

What is a market

A

place that brings buyers and sellers together