1.2 The market

Question 1

What does the demand curve look like and what does it suggest?

Answer 1

As price increases demand decreases (demand varies inversely with price)

Question 2

What factors lead to a change in demand? Name 3

Answer 2

• Price change of substitutes + complimentary goods
• Consumer income changes
• Fashion, tastes + preferences
• Advertising + branding
• Demographics
• External shocks
• Seasonality

Question 3

How does price change of substitutes and complementary goods affect demand?

Answer 3

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

Question 4

How do consumer income changes affect demand?

Answer 4

• Income rises, demand should typically rise
• Inferior goods, demand may decrease as people have more money to afford better alternatives

Question 5

How do fashions, tastes + preferences affect demand?

Answer 5

Demand for products that are fashionable/trendy will experience sharp fluctuations in demand

Question 6

How does advertising and branding affect demand?

Answer 6

Increase advertising, can cause increase awareness of product, so increase demand

Question 7

How do demographics affect demand?

Answer 7

Cause significant impact, eg. ageing population may increase demand for services to support older people

Question 8

How do external shocks affect demand?

Answer 8

Sudden event, like terrorism can impact demand for products/services

Question 9

How does seasonality affect demand?

Answer 9

For products depending on season may affect demand, eg. ski rental, high demand in winter

Question 10

What does the supply curve look like and what does it suggest?

Answer 10

As price rises so does quantity supplied

Question 11

What factors lead to a change in supply? Name 3

Answer 11

• Change in production cost
• Introduction of new technology
• Indirect taxes
• Government subsides
• External shocks

Question 12

How do changes in production cost affect supply?

Answer 12

Lower unit costs mean more can be supplied at each price, higher unit price means less can be supplied at each price

Question 13

How does introduction of new tech affect supply?

Answer 13

Can meaning existing supplies are produced more efficiently, so can supply more quicker

Question 14

How does indirect taxes affect supply?

Answer 14

Imposed on suppliers, eg. tax on cigarettes, causes inward shift of supply curve

Question 15

How do government subsides affect supply?

Answer 15

Involves form of payment by the government to suppliers, encourages increase output of supply

Question 16

How do external shocks affect supply?

Answer 16

Sudden economic shocks can cause companies to have to scale down, so decrease supply

Question 17

What does a demand and supply diagram look like?

Answer 17

Question 18

How do you calculate price elasticity of demand (PED)?

Answer 18

PED = % change in quantity demanded/% change in price

Question 19

How do you know if something is price elastic or inelastic?

Answer 19

Price elastic = More than 1
Price inelastic = Less than 1

Question 20

What factors affect PED?

Answer 20

• Brand strength
• Necessity
• Habit
• Availability of substitutes

Question 21

How does brand strength affect PED?

Answer 21

Products with strong brand loyalty and reputation tend to be price inelastic, eg. Apple

Question 22

How does necessity affect PED?

Answer 22

More essential or necessary a consumer deems a product the more demand tends to be inelastic

Question 23

How does habit affect PED?

Answer 23

Products demanded and consumed as a habit tend to be price inelastic

Question 24

How does availability of substitutes affect PED?

Answer 24

Demand for products with many alternatives tend to be price elastic

Question 25

How do you calculate income elasticity of demand (YED)?

Answer 25

YED = % change in quantity demanded/% change in income

Question 26

How does a change in income affect demand on a normal good?

Answer 26

Increase in consumer income should increase demand, decrease in consumer income should decrease demand

Question 27

How does change in income affect demand for luxury goods?

Answer 27

As income grows, more gets spent on luxury goods, if income decreases then less gets spent

Question 28

How does change in income affect demand for necessities?

Answer 28

Income grows, proportionally less is spent on necessities

Question 29

How does change in income affect demand for inferior goods?

Answer 29

Negative income elasticity, income rises causes fall in demand, income falls causes rise in demand

Question 30

What factors affect income elasticity of demand?

Answer 30

• Type of product, eg. luxury good or inferior good
• Whether income is expected to change

Question 31

How does income elasticity of demand affect businesses?

Answer 31

• Can help plan, eg. Company selling inferior goods can increase its stock in a recession
• Help a company increase its product portfolio