1.2 The Market Flashcards
What is demand
the level of interest customers have in a product
How does price effect demand
- 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
What is a subsitute product
similar, rival product that consumers may choose instead
What is a complement product
a product whose use accompanies another, so petrol is a complementary product to cars
Explain the relationship between demand for a product and the price of its complements
- if price of complementary product rises- demand for original product falls
- e.g if price of petrol falls- demand for cars increases
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
- 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
Name 5 factors that affect demand- positively and negatively
- 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)
How does supply have an effect on the profit a company makes
-the more a firm supplies, the more profit they will make
How does cost of production of a product affect supply
- if production costs rise, amount supplied will fall
- if production costs fall, amount supplied will rise
How does the introduction of technology within a business affect supply
-introduction of technology will lead to an increase in supply as
- lower production costs
- which offer higher profits
How does indirect taxes affect supply
- increase in indirect tax- increases costs- reduces supply
- decrease in indirect tax- cuts total costs- increases supply
What are indirect taxes
-taxes the government imposes on goods and service (VAT)
How do government subsidies affect supply
-cuts cost of production- subsidies increase supply
What are government subsidies
- opposite to tax
- occur when government wants to increase supply of a product (wind-powered energy)
- so offers subsidies to business
How do external shocks affect supply
-natural disasters reduce total quantity of item avaliable- price of item increases- production costs rise- reducing amount they are willing to supply
What happens if demand is higher than supply
- price of product will rise
- until demand falls abck to level of supply
What happens if supply is higher than demand
- price will fall
- stimulating more demand so product is sold
What is equilibrium in business
situation in a market where supply and demand are balanced- so price is stable
What are commodity markets
- markets for undifferentiated products
- e.g. raw materials
How can you work out equilibrium on a supply and demand graph
-equilibrium is where the supply line and demand line cross
What will occur to the price if -demand curve moves to the right (rises)
price goes up
-businesses can make additional profit- high demand- increasing price
What will occur to the price if demand curve moves to the left (falls)
price goes down
-entice customers in- lower price- hope to raise demand
What will occur to the price if -supply curve moves to the left (falls)
price goes up
-reduce demand to meet supply
What will occur to the price if -supply curve moves to the right (rises)
price goes down
What is price elasticity of demand
measures responsiveness of demand for a product to change its price
What is the formula for price elasticity of demand
% change in quantity demanded/ % change in price
what occurs if the product is price elastic and the price increases
- price increases
- revenue falls
- as small increase in price leads to fall in demand
what occurs if the product is price elastic and the price decrease
- effect on revenue
- explain
- revenue increases
- as small cut in price leads to large increase in demand
what occurs if the product is price inelastic and the price increases
- effect on revenue
- explain
- increases revenue
- as an increase in price leads to a small fall in demand
what occurs if the product is price inelastic and the price decreases
- effect on revenue
- explain
- revenue falls
- as price cut causes small increase in demand
What does it mean if price elasticity is more than 1
price elastic
change in demand is more than change in price
What does it mean if price elasticity is less than 1
price inelastic
change in demand is less than change in price
name 3 factors that influence price elasticity
- degree of product differentiation
- availability of direct substitutes
- branding and brand loyalty
Name 2 significant reasons of price elasticity
- help in forecasting sales- by considering impact of planned future price changes
- can help to decide on the best pricing strategy for increasing revenue
Name 2 reasons why price elasticity values change over time
- 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
how do you calculate income elasticity of demand
% change in demand/ % change in real incomes
Do inferior goods have a positive/ negative income elasticity
negative income elasticity
Do normal goods have a positive/ negative income elasticity
positive income elasticity
Do luxury goods have a positive/ negative income elasticity
positive income elasticity
What happens to inferior goods if
- changes in real income increase
- changes in real income decrease
- 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
What happens to normal goods if
- changes in real income increases
- changes in real income decreases
- 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
What happens to luxury goods if
- changes in real income increases
- changes in real income decreases
- 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
Name the 2 factors that affect income elasticity
- 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
Name 3 significant factors of income elasticity
- 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
What does it mean if a product is price elastic
changes in price have larger effect on demand/ sales
What does it mean if a product is price inelastic
changes in price have smaller effect on demand/ sales
What does elasticity measure
responsiveness of demand to a change in a relevant variable – such as price or income
What is unitary price elasticity
when PED is exactly 1
-change in demand = change in price
Definition of income elasticity of demand
measures extent to which quanitity of product is affected by a change in income
Name 6 non-price factors affecting demand
-seasonality
-external shocks
-changes in fashion & tastes
-price of substitutes
-advertising & branding
-changes to income
What is supply
number of goods businesses are willing to sell at a given price
Why is there an inverse relationship between the quantity demanded and the price
-as price ^ quantity demanded decreases
-as price decreases quantity demanded ^
Why is there a direct relationship between supply and price
-as when price ^ -> supply ^
-when price decreases -> supply decreases
Name 5 non-price factors affecting supply
-changes in cost of production
-external shocks
-new technology
-indirect taxes
-government subsides
What is a market
place that brings buyers and sellers together
