1.2 The Market Flashcards
Define Adding Value
Adding value = the difference between the price of the finished product/ service and the cost of the inputs involved in making it - adding special unique features to a product to help increase its selling price
4 Ways to add value:
- Build a brand
- Deliver excellent customer service
- Add product features and benefit customers wants
- Operate efficiently
Benefits of adding value
-Charge a higher price
-Creates a point of difference with competitors
-Protection against competitors offering lower prices
-Focuses business on its target market segment
What is Demand?
Demand for a good or service is the quantity that customers are willing and able to buy at a given price in a given period of time
What is the basic law of demand?
The basic law of demand is that demand varies inversely with price - lower prices make products more affordable for customers
Causes of changes in demand
-Incomes & price
-Fashions, tastes & preferences
-Advertising and branding
-External shocks
-Seasonal factors
-Demographics
Decrease in price=
Increases quantity demanded
Increase in price =
Fall in quantity demanded.
What is a luxury good?
A good which is non-essential, and is very responsive to change in income; an increase in income would cause a large increase in demand
What is a normal good/ necessity?
A good which is essential, demand less responsive to a change in price.
What is an inferior good?
A good which has an inverse relationship with income; as income rises, demand falls and vice versa e.g supermarket own brands
What is supply?
Supply is the quantity of a good or service that a producer is willing and able to supply
What is the basic law of supply?
As the price of a product rises, businesses expand to supply the market
Main causes of changes in supply
-Cost of production
-External shocks
-New technology
-Taxation & subsidies
What does a low unit cost mean?
A business can supply more at each price - e.g through higher productivity
What does a high unit cost mean?
Cause an inward shift of supply e.g rise in wage rates or an increase in energy prices/ other raw materials
What is a subsidy?
A subsidy is any form of government support - financial or otherwise- offered to producers and (occasionally) consumers
What is Market Equilibrium?
Balance between market demand and market supply
Define Price Elasticity of Demand
Price elasticity of demand measures the extent to which the quantity of a product demanded is affected by a change in price
Equation for price elasticity of demand
PED = %change in quantity demands/
%change in price
Interpreting Price Elasticity of Demand:
Price elastic
More than 1 = Change in demand is more than change in price
Interpreting Price Elasticity of Demand:
Price inelastic
Less than 1 = Change in demand is less than a change in price
Interpreting Price Elasticity of Demand:
Unitary price elasticity
Exactly 1 = change in demand = change in price
What value does a price elastic good have?
More than 1
What value does a price inelastic good have?
Less than 1
What value will a unitary price elastic good have?
Exactly 1
How will a decrease and increase in price of a price elastic good effect revenue?
Reduction in price = increased sales revenue
Increase in price = decreases sales revenue
Factors influencing PED
-Brand strength
-Competition
-Availability of substitutes
-Necessity
How does brand strength effect PED?
Products with strong brand and reputation tend to be more price inelastic people buy no matter the price.
Necessity - effect on PED
The more necessary a product, the more demand tends to be inelastic as people buy no matter the price.
Availability of substitutes - Effect on PED
Demand for products that have los of alternatives (substitutes) tends to be price elastic
Define income elasticity of demand (YED)
Income elasticity of demand measures the extent to which the quantity of a product demanded is affected by a change in income
Equation for income elasticity of demand (YED)
YED = %change in quantity demanded/
%change in income
Luxuries good effect on YED
-Income elasticity more than 1
-As income grows more is spent on luxuries, as income falls less is spent on luxuries.
Necessities effect on YED?
-Less than 1 but more than 0
-As income grows less is spent on necessities
What happens when income rises on inferior goods?
For inferior goods as income rises demand falls because consumers switch to better alternatives, substitute products become affordable
For inferior goods as income falls what happens to demand?
For inferior goods, as income falls demand increases
Limitations of calculating & using elasticities:
-Difficult to get reliable data
-Other factors affect demand e.g consumer tastes
-Many markets subject to rapid technological change - previous data less reliable
-Competitors will react
How can a company make demand more price inelastic?
Building strong brands and product USPs
Factor influencing YED?
-Stage in economic cycle eg recession and boom
-Minimum wage, legislation, taxes
-Nature of the good
What can understanding YED help a business to do?
Helps a business plan their production and produces helping them generate higher profits and have less exposure to downturns in the economy.
What pricing strategies are best used for products that are price elastic?
Price skimming
What pricing strategies are best used for products that are price inelastic?
Competitive pricing
