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
