1.2- The Market

Question 1

What is demand?

Answer 1

Demand is the amount of a good that consumers are willing and able to buy at a given price

Question 2

How are price and demand related?

Answer 2

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

Question 3

What are some non-price determinates of demand?

Answer 3

1. Price of substitutes
2. Alternative brands
3. Price of compliments
4. Changes in consumer income
5. Trends in fashion and tastes
6. Marketing, advertising and branding
7. Population structure / demographics
8. Time of year
9. Weather and climate
10. External shocks

Question 4

What is meant by supply?

Answer 4

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

Question 5

How are price and supply related?

Answer 5

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

Question 6

What are some non-price determinates of supply?

Answer 6

1. Cost of production
2. Introduction of new technology
3. Indirect taxes (e.g. VAT)
4. Government subsidies
5. External shocks

Question 7

What is meant by demand?

Answer 7

This is the amount of product or service that customers are willing and able to buy at a given price

Question 8

What is meant by market clearing price?

Answer 8

The interaction of buyers and sellers will provide an equilibrium price in a market where demand and supply is equal

Question 9

What is meant by surplus?

Answer 9

Where supply exceeds demand then there is a surplus

Question 10

What is meant by shortage?

Answer 10

Where demand exceeds supply there will be a shortage

Question 11

What are some non-price factors that affect supply?

Answer 11

1. Cost of production
2. Introduction of new technology
3. Indirect taxes (e.g. VAT)
4. Government subsidies
5. External shocks

Question 12

What are some non-price factors that affect demand?

Answer 12

1. Price of substitutes
2. Alternative brands
3. Price of compliments
4. Changes in consumer income
5. Trends in fashion and tastes
6. Advertising and branding
7. Population structure / demographics
8. Time of year
9. Weather and climate
10. External shocks

Question 13

What does PED stand for?

Answer 13

PED stands for price elasticity of demand

Question 14

What does PED mean?

Answer 14

PED measures the responsiveness of demand to a change in price. It can either be elastic or inelastic. PED values are always a minus

Question 15

What is the PED formula?

Answer 15

%change in quantity demanded/%change in price

Question 16

What is the % change in price formula?

Answer 16

Price new-price old/price old X 100

Question 17

What PED value determines whether it’ll be elastic and which value will determine it will be inelastic?

Answer 17

Elastic demand will be a value more than 1

Inelastic demand will be a value between 0 and 1

Question 18

What does elastic demand mean?

Answer 18

Products and services that have elastic demand are responsive to a change in price

Question 19

What does inelastic demand mean?

Answer 19

Inelastic demand is for goods where if the price is changed the demand stays the same

Question 20

How will the availability of substitutes affect demand?

Answer 20

When a market has a large number of available substitutes, then the more sensitive demand will be to price

Question 21

How will the frequency of purchase affect demand?

Answer 21

Products that are bought frequently by consumers tend to be very elastic (sensitive to price)

Question 22

How will necessities (staple goods) affect demand?

Answer 22

Necessities have lower price elasticises as consumers must purchase the product despite price changes

Question 23

How will luxury goods affect demand?

Answer 23

Luxury goods tend to be very expensive, these are a very large percentage of consumer’s incomes

Question 24

What is meant by competitive pricing?

Answer 24

Some products or services are priced very similar to close competitors

Question 25

What is meant by skimming pricing?

Answer 25

Products that are unique or first to market can have a high price can charged at introduction or launch

Question 26

What is meant by income elasticity of demand (YED)?

Answer 26

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

Question 27

What is meant by normal (necessity) goods?

Answer 27

Normal goods are those for which consumer demand increases when income increases

Question 28

What YED value would a normal (necessity) good be?

Answer 28

> 0 (a positive value)

Question 29

What is meant by inferior goods?

Answer 29

Inferior goods are products where demand decreases as income increases

Question 30

What YED value would an inferior good have?

Answer 30

<0 ( a negative value)

Question 31

What is meant by a luxury good?

Answer 31

A luxury good is when an increase in income causes a larger increase in demand (it’s all about proportion)

Question 32

What YED value would a luxury good have?

Answer 32

> 1 positive

Question 33

What is the YED formula?

Answer 33

%change in quantity demanded/%change in income

Question 34

What is the %change in price or quantity demanded formula?

Answer 34

Price new-price old/price old X 100

Question 35

What are some factors influencing YED = luxury goods?

Answer 35

An increase in income will mean an increase in the demand for luxury goods

Question 36

What are some factors influencing YED = normal goods

Answer 36

An increase in income will lead to an increase in demand

Question 37

What are some factors influencing YED = inferior goods

Answer 37

An increase in income will lead to a fall in demand for inferior goods

Question 38

Why do businesses use YED?

Answer 38

YED is used by business to help them decide what products and services they should offer in order to increase sales