1.2 The Market Flashcards
define complementary goods
goods that are purchased together because they are consumed together
define demand
the quantity of a product bought at a given price over a given period of time
define demand curve
a line drawn on a graph that shows how much of a good will be bought at different prices
define inferior goods
goods for which demand will fall if income rises or rise if income falls.
define normal goods
goods for which demand will rise if income rises or fall if income falls
define substitute goods
goods that can be bought as an alternative to others, but perform the same functions
define subsidy
a grant given to producers, usually to encourage the production of a certain good
define supply
the amount of product that suppliers make available to the market at any given price in a given period of time
define supply curve
a line drawn on a graph that shows how much of a good sellers are willing to supply at different prices
define equilibrium price/market clearing price
the price where supply and demand are equal
define excess demand
the position where demand is greater than supply at any given price and there are shortages in the market
define excess supply
the position where supply is greater than demand at a given price and there are unsold goods in the market
define total revenue /expenditure
the amount of revenue generated from the sale of goods calculated by multiplying price by quantity in a given period of time
define price elastic demand
a change in price results in a greater change in demand
define price elasticity of demand
the responsiveness of demand to a change in price
define price inelastic demand
a change in price results in a proportionately smaller change in demand
define discretionary expenditure
non-essential spending
define income elastic demand
the percentage change in demand for a product id proportionately greater than the percentage change in income
define income elasticity of demand
the responsiveness of demand to a change in income
define income inelastic demand
where the percentage change in demand is proportionately less than the percentage change in income
what is a supply and demand diagram?
plots quantity of a product in supply or demand against a range of different prices
has two curves, one for supply and one for demand
what is the relationship between demand and price?
inproportionate
d curve goes downwards
high price = less demand as less willing to pay more
low price= high demand as more willling to pay less
what is the relationship between supply and price?
proportionate
s curve goes upwards
higher price = high supply
low price = less supply
why would producers and sellers aim to maximise their profits?
higher price -> higher profit
-> incentive to expand production and increase supply
- althoough inc supply -> inc costs
what is the equilibrium price and what does it mean for supply &demand?
when Q for demand is = Q for supply
on the graph where two curves meet
when does a surplus occur?
when price increases
moves curve to right for supply and demand to the left
Q demanded is less than Q supplied
when does a shortage occur?
when price decreases
supply moves to left
demand moves to right
Q demanded is more than Q supplied
what are the other factors that demand is influenced by?
Substitutes - e.g. price change of Margerine will cause change in demand for butter.
Complementary products - if price for one increases, demand for both fall
Consumer income - higher income -> more demand for expensive
Consumer tasts and preferences
Advertising and Branding
Demographics
Seasonal changes
External shocks
what are factors which supply is influenced by?
Cost of production
Indirect taxes - taxes on goods or services like VAT
Subsidies - helps with costs of suppling more
New technology -> efficient production techniques -> cost savings
Weather conditions
External shocks e.g. covid, war
what will happen to the demand curve if there is a rise in demand?
moves to the right
price needs to rise to clear excess demand
new equlibrium Q is reached at a higher price than before
what will happen to the demand curve if there is a fall in demand?
moves to the left
price needs to fall to clear excess supply
new equilibrium Q is reached at a lower price than before
what will happen to the supply curve if supply rises?
moves to the right
price needs to fall to clear excess supply
new equilibrium Q is reached at a lower price
what will happen to the supply curve if supply falls?
moves to the left
price needs to rise to clear excess demand
new equilibrium Q is reached at a higher price
what is the formula for price elasticity of demand?
PED = %change in Q demanded/ %change in price
what do values of PED mean?
always a minus - ignore it
if greater than 1 = price elastic
if less than 1 = price inelastic
for elastic products, out of % change in price and % change in Q demanded is higher?
% change in demand
for inelastic products, out of % change in price and % change in Q demand is higher?
% change in price
what price elasticity does neccesities have?
inelastic
as changing prices wont effect demand much as ppl are going to buy them anyway
but if customers switch to competitor products -> elastic
what price elasticity do inferior goods have?
elastic
as demand levels will change according to price
what are some factors which effect price elasticity?
Neccesity/Inferior
how differentiated the business is -> more = less price elastic as customers wont switch even if price changes
alternative products
income elasticity
how often a customer buys the product
PED can change due to uncertainties
how will a demand curve show a product that is price elastic?
a shallow demand curve
shows demand for product is v dependant on price
small change in price -> large change in demand
how will a demand curve show a product that is price inelastic?
a steep demand curve
product is not dependant on price
large change in price not lead to large change in demand
how can price elasticity affect sales revenue?
if price elastic = price inc -> sales dec, money lost from % dec in sales more than % money gained for inc in price
-inc sales revenue by reducing price
if price inelastic = inc in price -> inc in sales, money lost from %decrease in sales will be less than money gained from % increase in price
-inc sales by dec price only for a short time
what is the formula for income elasticity of demand?
IED =% change in Q demanded/ % change in income
how does whether the product is a neccesity, inferior and luxury affect IED?
neccesity = positive IED, as income rises, demand rises - proportional relationship
inferior= negative IED, as income rises demand falls, disproportionate relationship
luxury = Positive IED, income rises so does demand
How can PED help a business make choices?
decide whether to rise or lower prices and see its affect on sales revenue
elastic = set low and comp prices -> inc revenue
inelastic = high prices and price skimming to inc revenue
deciding what products to promote depending on whether incomes rise or fall
