1.2 The Market

Question 1

What is Demand?

Answer 1

demand is the amount of a product that consumers are willing and able to purchase at any given price

Question 2

What factors lead to a change in demand?

Answer 2

-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

Question 3

How do different demographics affect demand?

Answer 3

-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

Question 4

What is Supply?

Answer 4

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

Question 5

What is fixed supply?

Answer 5

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

Question 6

What factors lead to a change in supply?

Answer 6

• 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

Question 7

How do External shock affect supply?

Answer 7

• 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

Question 8

How does the Bank of England affect supply?

Answer 8

-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

Question 9

What is Excess demand?

Answer 9

the position where demand is greater than supply and there are shortages inthe market

Question 10

What is Excess Supply?

Answer 10

the position where supply is greater than demand and there are unsold gods in the market

Question 11

What happens to price when demand falls?

Answer 11

• the business have to lower the price
• if they dont lower it they coud be too much insold stock

Question 12

What happens to price when supply goes up?

Answer 12

• prices go down as they is too much supply

Question 13

What is equilibrium?

Answer 13

also known as market clearing price where the amount supplied is completely brought by consumers

Question 14

What is disequilibrium?

Answer 14

where the price in the market is not set at the point where supply and demand are equal

Question 15

What is PED?

Answer 15

-Price Elasticity of Demand
- How responsive a products demand i to a change in the price
-understanding PED helps you set the right pricing

Question 16

What is a Price Elastic product?

Answer 16

• 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

Question 17

What is a Price Inelastic product?

Answer 17

• 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

Question 18

How do you Calculate Price Elasticity of Demand?

Answer 18

-Percentage change in quantity demanded/ Percentage change in price

Question 19

What factors that influencing PED?

Answer 19

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

Question 20

What is YED?

Answer 20

-Income Elasticity of Demand
- how responsive is demand to a change in income

Question 21

What is a Income Elastic product?

Answer 21

-greater than 1
-if income increases and demand increases more than it is income elastic
-holidays, entertainment –> Luxury goods and discretionary expenditure

Question 22

What is a Income Inelastic product?

Answer 22

-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

Question 23

Why do you pay attention to the negative sign in the YED value?

Answer 23

• 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

Question 24

What is the YED formula?

Answer 24

Percentage change in quantity demanded/ percentage change in income

Question 25

What happens to inelastic products when income increases?

Answer 25

• normal –> demand increases
  -Inferior –> demand decreases

Question 26

What happens to elastic products when income increases?

Answer 26

• normal –> demand increases
• inferior –>demand decreases

Question 27

What factors affect YED?

Answer 27

it depends on the type of goods it is
- Necessities –> income inelastic, water, electrics and arguably cigarettes
-Luxuries –> things you buy if you can afford them
-Discretionary Expenditure –> non-essential spending or spending that is not automatic
-Price –> low priced products often inelastic

Question 28

What is Discretionary Expenditure?

Answer 28

-non-essential spending or spending that is not automatic

Question 29

What is the significance of income elasticity of demand to businesses?

Answer 29

-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