1.2- The Market Flashcards
What is demand?
Demand is the amount of a good that consumers are willing and able to buy at a given price
How are price and demand related?
As the price increases on a product or service, normally, the demand will decrease as less customers are willing (or able) to pay the price
What are some non-price determinates of demand?
- Price of substitutes
- Alternative brands
- Price of compliments
- Changes in consumer income
- Trends in fashion and tastes
- Marketing, advertising and branding
- Population structure / demographics
- Time of year
- Weather and climate
- External shocks
What is meant by supply?
Supply is measured in terms of the quantity of a good or service that a producer is willing and able to make available on the market, at a given price, over a given period of time
How are price and supply related?
As a price paid by customers increases on a product or service, normally, a business will want to supply more, in anticipation of higher profits
What are some non-price determinates of supply?
- Cost of production
- Introduction of new technology
- Indirect taxes (e.g. VAT)
- Government subsidies
- External shocks
What is meant by demand?
This is the amount of product or service that customers are willing and able to buy at a given price
What is meant by market clearing price?
The interaction of buyers and sellers will provide an equilibrium price in a market where demand and supply is equal
What is meant by surplus?
Where supply exceeds demand then there is a surplus
What is meant by shortage?
Where demand exceeds supply there will be a shortage
What are some non-price factors that affect supply?
- Cost of production
- Introduction of new technology
- Indirect taxes (e.g. VAT)
- Government subsidies
- External shocks
What are some non-price factors that affect demand?
- Price of substitutes
- Alternative brands
- Price of compliments
- Changes in consumer income
- Trends in fashion and tastes
- Advertising and branding
- Population structure / demographics
- Time of year
- Weather and climate
- External shocks
What does PED stand for?
PED stands for price elasticity of demand
What does PED mean?
PED measures the responsiveness of demand to a change in price. It can either be elastic or inelastic. PED values are always a minus
What is the PED formula?
%change in quantity demanded/%change in price
What is the % change in price formula?
Price new-price old/price old X 100
What PED value determines whether it’ll be elastic and which value will determine it will be inelastic?
Elastic demand will be a value more than 1
Inelastic demand will be a value between 0 and 1
What does elastic demand mean?
Products and services that have elastic demand are responsive to a change in price
What does inelastic demand mean?
Inelastic demand is for goods where if the price is changed the demand stays the same
How will the availability of substitutes affect demand?
When a market has a large number of available substitutes, then the more sensitive demand will be to price
How will the frequency of purchase affect demand?
Products that are bought frequently by consumers tend to be very elastic (sensitive to price)
How will necessities (staple goods) affect demand?
Necessities have lower price elasticises as consumers must purchase the product despite price changes
How will luxury goods affect demand?
Luxury goods tend to be very expensive, these are a very large percentage of consumer’s incomes
What is meant by competitive pricing?
Some products or services are priced very similar to close competitors
What is meant by skimming pricing?
Products that are unique or first to market can have a high price can charged at introduction or launch
What is meant by income elasticity of demand (YED)?
It is a calculation used, by business, to estimate how demand will change given changes in income. As consumer incomes change (up or down) so do demands
What is meant by normal (necessity) goods?
Normal goods are those for which consumer demand increases when income increases
What YED value would a normal (necessity) good be?
> 0 (a positive value)
What is meant by inferior goods?
Inferior goods are products where demand decreases as income increases
What YED value would an inferior good have?
<0 ( a negative value)
What is meant by a luxury good?
A luxury good is when an increase in income causes a larger increase in demand (it’s all about proportion)
What YED value would a luxury good have?
> 1 positive
What is the YED formula?
%change in quantity demanded/%change in income
What is the %change in price or quantity demanded formula?
Price new-price old/price old X 100
What are some factors influencing YED = luxury goods?
An increase in income will mean an increase in the demand for luxury goods
What are some factors influencing YED = normal goods
An increase in income will lead to an increase in demand
What are some factors influencing YED = inferior goods
An increase in income will lead to a fall in demand for inferior goods
Why do businesses use YED?
YED is used by business to help them decide what products and services they should offer in order to increase sales
