1.2 The Market Flashcards
What is Demand?
demand is the amount of a product that consumers are willing and able to purchase at any given price
What factors lead to a change in demand?
- Change in the price of substitutes e.g. pepsi and coke
- Price of compliments –> cornflakes and milk
- Change in consumer incomes –> Normal goods vs inferior goods
- Fashions, taste, and preferences–> snoods, increase in demand for bike due to triathlons.
- advertising and branding
- Demographics
- External Shock –> competition, government - taxes and laws, Economic climate
- Seasonality –>the seasons have an impact on what we buy as does calendar events
How do different demographics affect demand?
- Age–> distributions - centennials
- Gender –> Slightly more women than men
- Geographical –> more urbanisation, greater demand or school, hospital
- Other group –> single parent families, ethnic groups more demand for products associated with their culture immigration - polish products
What is Supply?
the amount of a product which suppliers will offer to the market at a given price
- the higher the price, the more will be offered in the market
What is fixed supply?
this is when there is a limit to supply, so price is irrelevant e.g. the number of swats in a cinema, tickets at the Wolves Civic
What factors lead to a change in supply?
- changes in the cost of production - raw materials, energy wages, rent machinery
- the availability of resources –> a lack of resources can reduce supply
- Introduction of new technology
- Indirect taxes –> e.g. VAT and excise taxes
- Government subsidies –> grants to reduce costs, farming and renewable power sources
- external shocks
- Bank of England –> interest rates
How do External shock affect supply?
- World events –> wars, financial crisis
- Weather –> impact on agriculture but also distributing good
- Government –> Bank of England increasing interest rates, increases costs of loan repayments, legislation can make markets less competitive
- Price of relate goods –>if similar goods are going up in price businesses might change to supply more of that product and reduce supply of its current product e.g. carrot and potatoes
How does the Bank of England affect supply?
- High interest rates –> good for savers, bad for loan repayments
- Low interest rates –> Bad for savers, good for loan repayers
- Low interest rates –> to increase consumer spending
What is Excess demand?
the position where demand is greater than supply and there are shortages inthe market
What is Excess Supply?
the position where supply is greater than demand and there are unsold gods in the market
What happens to price when demand falls?
- the business have to lower the price
- if they dont lower it they coud be too much insold stock
What happens to price when supply goes up?
- prices go down as they is too much supply
What is equilibrium?
also known as market clearing price where the amount supplied is completely brought by consumers
It is the point where the 2 curves cross - i.e. the point at which the price will be stable in the short term
What is disequilibrium?
where the price in the market is not set at the point where supply and demand are equal
What is PED?
- Price Elasticity of Demand
- How responsive a products demand is to a change in the price
- understanding PED helps you set the right pricing
What is a Price Elastic product?
- there is more response to a change in price
- result is greater than 1
- if price fall more people will buy but if price rises demand will fall rapidly
What is a Price Inelastic product?
- there is little response to a change in price
- result is less than 1
- if price decrease revenue decreases, but if price increases revenue increases
How do you Calculate Price Elasticity of Demand?
-Percentage change in quantity demanded DIVIDE BY Percentage change in price
What factors that influencing PED?
Major factors are
degree of product differentiation
availability of direct substitutes
branding and brand loyalty
The main impact is how easy is it to get substitutes so impact include:
- Time –> long term people can afford to switch e.g. more efficient cars if petrol prices go up
- Competition for same product –> highly elastic and products which are easily substitutes by competitors e.g. potatoes
- Branding –> the stronger the brand, the more inelastic
- product types vs. the product of an individual business, petrol industry vs. individual companies like shell have more elasticity
What is YED?
- Income Elasticity of Demand
- how responsive is demand for a product to a change in REAL income
What is a Income Elastic product?
- greater than 1
- if income increases and demand increases more than it is income elastic
- holidays, entertainment –> Luxury goods and discretionary expenditure
What is a Income Inelastic product?
- less than 1
- if income increases and demand increases a smaller amount it is income inelastic
- essential goods such as milk, food and heating fuel
Why do you pay attention to the negative sign in the YED value?
- tells you whether it is a normal good or inferior good
- where there is a decrease in demand there is a negative result for inferior goods
What is the YED formula?
Percentage change in quantity demanded DIVIDE BY percentage change in income
What happens to inelastic products when income increases?
- normal –> demand increases
- Inferior –> demand decreases
What happens to elastic products when income increases?
- normal –> demand increases
- inferior –>demand decreases
What factors affect YED?
it depends on whether the good is a indulgence or a necessity
- Necessities –> basic items we would always expect to buy - water, electrics, bread and milk
- Luxuries –> things you buy if you can afford them
What is Discretionary Expenditure?
-non-essential spending or spending that is not automatic
What is the significance of income elasticity of demand to businesses?
Sales forecasting - knowledge of the likely reaction of a product to a change in real incomes allows a business to forecast sales
Aid Financial planning - the information from the sales forecast can be factored into budgets and financial plans
Design a balanced product portfolio - Product portfolio management - having a portfolio consisting of luxuries or inferior goods increases the danger of changes in real income impacting on sales, therefore firms better to spread their risk by having product portfolios with a range of income inelasticity’s
???? - not sure if we need this
- businesses selling goods with high income elasticity - closely linked to economic cycle
- Businesses selling goods with low income elasticity –> stable, good for planning, maybe diversity
- Production planning -cut production in recession, car manufacturing
- Product switching - switch to more elastic product during growth
What is the significance of price elasticity ?
Useful to managers for 2 reasons
It can help in forecasting sales by considering the likely impact of planned future price changes
Knowledge of PE can help decide on the best pricing strategy for increasing revenue
BUT PE changes over time and this unpredictability can undermine the usefulness of PE by making it hard to really know the current PE until after the price has been changed and the effect on demand measured
What is real income ?
the amount by which average incomes have adjusted for inflation
e.g. incomes up 3% and inflation 1.2% = real incomes up by 1.8%
What does a demand curve show ?
the amount of the product that would be demanded at a range of prcie levels
What is a supply curve ?
the amount of a product that firms would be willing to supply at different price levels
What do shifts in demand and supply cause ?
Changes in the equilibrium price in a market
Do all price elasticities have negative values ?
YES
What is the elasticity for price inelastic products ?
0 and -1
What is the elasticity for price elastic products ?
Elasticity of Greater than -1
According to their income elasticity products are classified as …….(3 classifications)
Luxury goods
Normal goods
Inferior goods
