1.2 The Market

Question 1

define complementary goods

Answer 1

goods that are purchased together because they are consumed together

Question 2

define demand

Answer 2

the quantity of a product bought at a given price over a given period of time

Question 3

define demand curve

Answer 3

a line drawn on a graph that shows how much of a good will be bought at different prices

Question 4

define inferior goods

Answer 4

goods for which demand will fall if income rises or rise if income falls.

Question 5

define normal goods

Answer 5

goods for which demand will rise if income rises or fall if income falls

Question 6

define substitute goods

Answer 6

goods that can be bought as an alternative to others, but perform the same functions

Question 7

define subsidy

Answer 7

a grant given to producers, usually to encourage the production of a certain good

Question 8

define supply

Answer 8

the amount of product that suppliers make available to the market at any given price in a given period of time

Question 9

define supply curve

Answer 9

a line drawn on a graph that shows how much of a good sellers are willing to supply at different prices

Question 10

define equilibrium price/market clearing price

Answer 10

the price where supply and demand are equal

Question 11

define excess demand

Answer 11

the position where demand is greater than supply at any given price and there are shortages in the market

Question 12

define excess supply

Answer 12

the position where supply is greater than demand at a given price and there are unsold goods in the market

Question 13

define total revenue /expenditure

Answer 13

the amount of revenue generated from the sale of goods calculated by multiplying price by quantity in a given period of time

Question 14

define price elastic demand

Answer 14

a change in price results in a greater change in demand

Question 15

define price elasticity of demand

Answer 15

the responsiveness of demand to a change in price

Question 16

define price inelastic demand

Answer 16

a change in price results in a proportionately smaller change in demand

Question 17

define discretionary expenditure

Answer 17

non-essential spending

Question 18

define income elastic demand

Answer 18

the percentage change in demand for a product id proportionately greater than the percentage change in income

Question 19

define income elasticity of demand

Answer 19

the responsiveness of demand to a change in income

Question 20

define income inelastic demand

Answer 20

where the percentage change in demand is proportionately less than the percentage change in income

Question 21

what is a supply and demand diagram?

Answer 21

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

Question 22

what is the relationship between demand and price?

Answer 22

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

Question 23

what is the relationship between supply and price?

Answer 23

proportionate
s curve goes upwards
higher price = high supply
low price = less supply

Question 24

why would producers and sellers aim to maximise their profits?

Answer 24

higher price -> higher profit
-> incentive to expand production and increase supply
- althoough inc supply -> inc costs

Question 25

what is the equilibrium price and what does it mean for supply &demand?

Answer 25

when Q for demand is = Q for supply on the graph where two curves meet

Question 26

when does a surplus occur?

Answer 26

when price increases moves curve to right for supply and demand to the left Q demanded is less than Q supplied

Question 27

when does a shortage occur?

Answer 27

when price decreases supply moves to left demand moves to right Q demanded is more than Q supplied

Question 28

what are the other factors that demand is influenced by?

Answer 28

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

Question 29

what are factors which supply is influenced by?

Answer 29

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

Question 30

what will happen to the demand curve if there is a rise in demand?

Answer 30

moves to the right price needs to rise to clear excess demand new equlibrium Q is reached at a higher price than before

Question 31

what will happen to the demand curve if there is a fall in demand?

Answer 31

moves to the left price needs to fall to clear excess supply new equilibrium Q is reached at a lower price than before

Question 32

what will happen to the supply curve if supply rises?

Answer 32

moves to the right price needs to fall to clear excess supply new equilibrium Q is reached at a lower price

Question 33

what will happen to the supply curve if supply falls?

Answer 33

moves to the left price needs to rise to clear excess demand new equilibrium Q is reached at a higher price

Question 34

what is the formula for price elasticity of demand?

Answer 34

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

Question 35

what do values of PED mean?

Answer 35

always a minus - ignore it if greater than 1 = price elastic if less than 1 = price inelastic

Question 36

for elastic products, out of % change in price and % change in Q demanded is higher?

Answer 36

% change in demand

Question 37

for inelastic products, out of % change in price and % change in Q demand is higher?

Answer 37

% change in price

Question 38

what price elasticity does neccesities have?

Answer 38

inelastic as changing prices wont effect demand much as ppl are going to buy them anyway but if customers switch to competitor products -> elastic

Question 39

what price elasticity do inferior goods have?

Answer 39

elastic as demand levels will change according to price

Question 40

what are some factors which effect price elasticity?

Answer 40

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

Question 41

how will a demand curve show a product that is price elastic?

Answer 41

a shallow demand curve shows demand for product is v dependant on price small change in price -> large change in demand

Question 42

how will a demand curve show a product that is price inelastic?

Answer 42

a steep demand curve product is not dependant on price large change in price not lead to large change in demand

Question 43

how can price elasticity affect sales revenue?

Answer 43

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

Question 44

what is the formula for income elasticity of demand?

Answer 44

IED =% change in Q demanded/ % change in income

Question 45

how does whether the product is a neccesity, inferior and luxury affect IED?

Answer 45

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

Question 46

How can PED help a business make choices?

Answer 46

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