1.2 The market Flashcards
What does the demand curve look like and what does it suggest?
As price increases demand decreases (demand varies inversely with price)
What factors lead to a change in demand? Name 3
- Price change of substitutes + complimentary goods
- Consumer income changes
- Fashion, tastes + preferences
- Advertising + branding
- Demographics
- External shocks
- Seasonality
How does price change of substitutes and complementary goods affect demand?
Complementary - Eg. if prices of a toaster decrease, demand for toasters and bread will increase
Substitute goods - Eg. If prices of tea rise demand for tea will decrease and people may switch to buying coffee as it’s cheaper
How do consumer income changes affect demand?
- Income rises, demand should typically rise
- Inferior goods, demand may decrease as people have more money to afford better alternatives
How do fashions, tastes + preferences affect demand?
Demand for products that are fashionable/trendy will experience sharp fluctuations in demand
How does advertising and branding affect demand?
Increase advertising, can cause increase awareness of product, so increase demand
How do demographics affect demand?
Cause significant impact, eg. ageing population may increase demand for services to support older people
How do external shocks affect demand?
Sudden event, like terrorism can impact demand for products/services
How does seasonality affect demand?
For products depending on season may affect demand, eg. ski rental, high demand in winter
What does the supply curve look like and what does it suggest?
As price rises so does quantity supplied
What factors lead to a change in supply? Name 3
- Change in production cost
- Introduction of new technology
- Indirect taxes
- Government subsides
- External shocks
How do changes in production cost affect supply?
Lower unit costs mean more can be supplied at each price, higher unit price means less can be supplied at each price
How does introduction of new tech affect supply?
Can meaning existing supplies are produced more efficiently, so can supply more quicker
How does indirect taxes affect supply?
Imposed on suppliers, eg. tax on cigarettes, causes inward shift of supply curve
How do government subsides affect supply?
Involves form of payment by the government to suppliers, encourages increase output of supply
How do external shocks affect supply?
Sudden economic shocks can cause companies to have to scale down, so decrease supply
What does a demand and supply diagram look like?
How do you calculate price elasticity of demand (PED)?
PED = % change in quantity demanded/% change in price
How do you know if something is price elastic or inelastic?
Price elastic = More than 1
Price inelastic = Less than 1
What factors affect PED?
- Brand strength
- Necessity
- Habit
- Availability of substitutes
How does brand strength affect PED?
Products with strong brand loyalty and reputation tend to be price inelastic, eg. Apple
How does necessity affect PED?
More essential or necessary a consumer deems a product the more demand tends to be inelastic
How does habit affect PED?
Products demanded and consumed as a habit tend to be price inelastic
How does availability of substitutes affect PED?
Demand for products with many alternatives tend to be price elastic
How do you calculate income elasticity of demand (YED)?
YED = % change in quantity demanded/% change in income
How does a change in income affect demand on a normal good?
Increase in consumer income should increase demand, decrease in consumer income should decrease demand
How does change in income affect demand for luxury goods?
As income grows, more gets spent on luxury goods, if income decreases then less gets spent
How does change in income affect demand for necessities?
Income grows, proportionally less is spent on necessities
How does change in income affect demand for inferior goods?
Negative income elasticity, income rises causes fall in demand, income falls causes rise in demand
What factors affect income elasticity of demand?
- Type of product, eg. luxury good or inferior good
- Whether income is expected to change
How does income elasticity of demand affect businesses?
- Can help plan, eg. Company selling inferior goods can increase its stock in a recession
- Help a company increase its product portfolio
