1.2 - The Market Flashcards
Demand
the amount of a good that consumers are willing and able to buy at a given price.
What does high demand depend on
- Price of product
- Income of consumers
- Demand for substitutes
- Demand for complement goods
- Consumer taste
- Advertising and promotion
- Seasonal factors
Substitute goods
- Products that perfom a similar function
- Change in price of these will impact demand
Complementary goods impact on demand
Domino effect
Demand for one good impacts demand of another (linked purchase) e.g. petrol and cars
On a supply and demand diagram, if demand has increased which way does the line move?
More demand= moves right (outward shift)
Factors that can lead to shift in demand
- Changes in price of other goods
- Fashions, tastes, preferences
- Advertising & branding
- Demographics
- External shocks
- Seasonality
Supply
The quantity of a good/ service that a producer is willing to provide to the marketplace at different prices
Factors that increase supply
- Changes in technology
- Changes in climate
- Government subsidies
Factors that decrease supply
- Government taxes
- Number of sellers
- External shocks
Formula for price elasticity of demand (PED)
% change in quantity demanded / % change in price
If demand is elastic…
Demand does change with price, if price drops demand should rise significantly
If demand is inelastic…
Demand does NOT change with price
e.g. still need petrol to fill up the car
PED values
0 = perfectly inelastic
1> = inelastic
1< = elastic
1 = elastic
Income elasticity (YED)
Measures relationship between change in quantity demanded and change in real income
YED formula
% change in demand/ % change in income
