1.2 The Market

Question 1

What seven factors can lead to a change in demand?

Answer 1

Changes in price of substitutes and complementary goods.
Changes in consumer income.
Fashion tastes and preferences.
Advertising and branding.
Demographics.
External shocks.
Seasonality.

Question 2

What five factors can lead to a change in supply?

Answer 2

Changes in costs of production.
Introduction of new technology.
Indirect taxes.
Government subsidies.
External shocks.

Question 3

What is equilibrium price?

Answer 3

A situation in the market where supply and demand are balanced.
Where supply and demand cross on a supply and demand diagram.

Question 4

What effect does a demand curve shifting right (fall) have on price?

Answer 4

Price will move up

Question 5

What effect does a demand curve shifting left (rise) have on price?

Answer 5

Price will move down

Question 6

What effect does a supply curve shifting left have on price?

Answer 6

Price will move up

Question 7

What effect does a supply curve shifting right have on price?

Answer 7

Price will move down

Question 8

What is the formula for price elasticity of demand?

Answer 8

Price elasticity of demand = % change in demand / % change in price

Question 9

Ignoring minus signs, what does an answer greater than one show about the price elasticity of a product?

Answer 9

Greater than 1 = elastic

Question 10

Ignoring minus signs, what does an answer lower than one show about the price elasticity of a product?

Answer 10

Lower than 1 = inelastic

Question 11

What would be the likely impact on revenue if a firm raised the price of a PED inelastic good?

Answer 11

Total revenue increase

Question 12

What would be the likely impact on revenue if a firm lowered the price of a PED inelastic good?

Answer 12

Total revenue decrease

Question 13

What would be the likely impact on revenue if a firm lowered the price of a PED elastic good?

Answer 13

Total revenue increase

Question 14

What would be the likely impact on revenue if a firm raised the price of a PED elastic good?

Answer 14

Total revenue decrease

Question 15

What three factors can affect the price elasticity of a product?

Answer 15

Availability of substitutes.
Brand reputation and loyalty.
Degree of loyalty.

Question 16

In what ways can price elasticity be useful to businesses?

Answer 16

Forecasting sales.
Decisions regarding pricing strategies.

Question 17

What is the formula for income elasticity of demand?

Answer 17

Income elasticity of demand = % change in demand / % change in income

Question 18

When interpreting YED, which three categories are goods normally divided into?

Answer 18

Inferior
Normal
Luxury

Question 19

What likely effect could an increase in income have on the demand for an inferior good?

Answer 19

Demand decrease.
Consumers can afford to buy less cheaper substitutes.

Question 20

What likely effect could an decrease in income have on the demand for an inferior good?

Answer 20

Demand increase.
Consumers switch to more affordable goods to save money.

Question 21

What likely effect could an increase in income have on the demand for a normal good?

Answer 21

Demand increase at same rate as income.
Increasingly affluent consumers now able to afford this type of good more.

Question 22

What likely effect could a decrease in income have on the demand for a normal good?

Answer 22

Demand decrease at same rate as income.
Consumers cut back on these goods as they become less affordable.

Question 23

What likely effect could a increase in income have on the demand for a luxury good?

Answer 23

Demand increase at faster rate than income.
Consumer incomes rise, extra income can be spent on luxuries.

Question 24

What likely effect could a decrease in income have on the demand for a luxury good?

Answer 24

Demand decrease at faster rate than income.
These goods will be the first to be sacrificed as consumers have less extra income.

Question 25

In what ways can income elasticity be useful to a business?

Answer 25

Sales forecasting.
Financial planning.
Product portfolio management.