1.2 The Market Flashcards
What seven factors can lead to a change in demand?
Changes in price of substitutes and complementary goods.
Changes in consumer income.
Fashion tastes and preferences.
Advertising and branding.
Demographics.
External shocks.
Seasonality.
What five factors can lead to a change in supply?
Changes in costs of production.
Introduction of new technology.
Indirect taxes.
Government subsidies.
External shocks.
What is equilibrium price?
A situation in the market where supply and demand are balanced.
Where supply and demand cross on a supply and demand diagram.
What effect does a demand curve shifting right (fall) have on price?
Price will move up
What effect does a demand curve shifting left (rise) have on price?
Price will move down
What effect does a supply curve shifting left have on price?
Price will move up
What effect does a supply curve shifting right have on price?
Price will move down
What is the formula for price elasticity of demand?
Price elasticity of demand = % change in demand / % change in price
Ignoring minus signs, what does an answer greater than one show about the price elasticity of a product?
Greater than 1 = elastic
Ignoring minus signs, what does an answer lower than one show about the price elasticity of a product?
Lower than 1 = inelastic
What would be the likely impact on revenue if a firm raised the price of a PED inelastic good?
Total revenue increase
What would be the likely impact on revenue if a firm lowered the price of a PED inelastic good?
Total revenue decrease
What would be the likely impact on revenue if a firm lowered the price of a PED elastic good?
Total revenue increase
What would be the likely impact on revenue if a firm raised the price of a PED elastic good?
Total revenue decrease
What three factors can affect the price elasticity of a product?
Availability of substitutes.
Brand reputation and loyalty.
Degree of loyalty.
In what ways can price elasticity be useful to businesses?
Forecasting sales.
Decisions regarding pricing strategies.
What is the formula for income elasticity of demand?
Income elasticity of demand = % change in demand / % change in income
When interpreting YED, which three categories are goods normally divided into?
Inferior
Normal
Luxury
What likely effect could an increase in income have on the demand for an inferior good?
Demand decrease.
Consumers can afford to buy less cheaper substitutes.
What likely effect could an decrease in income have on the demand for an inferior good?
Demand increase.
Consumers switch to more affordable goods to save money.
What likely effect could an increase in income have on the demand for a normal good?
Demand increase at same rate as income.
Increasingly affluent consumers now able to afford this type of good more.
What likely effect could a decrease in income have on the demand for a normal good?
Demand decrease at same rate as income.
Consumers cut back on these goods as they become less affordable.
What likely effect could a increase in income have on the demand for a luxury good?
Demand increase at faster rate than income.
Consumer incomes rise, extra income can be spent on luxuries.
What likely effect could a decrease in income have on the demand for a luxury good?
Demand decrease at faster rate than income.
These goods will be the first to be sacrificed as consumers have less extra income.
In what ways can income elasticity be useful to a business?
Sales forecasting.
Financial planning.
Product portfolio management.
