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Business A Level > 1.2 The Market > Flashcards

1.2 The Market Flashcards

1
Q

What is demand

A

The quantity that customers are willing and able to buy at a given period of time at a given price

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2
Q

The simple demand curve

A

A higher price leads to reduction of quantity demanded

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3
Q

Causes of change in demand

A
  • incomes
  • price
  • advertising and branding
  • fashion, tastes and preference
  • demographic change
  • seasonal factors
  • external shocks
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4
Q

What is the Basic Law of demand?

A

Demand varies inversely with price
E.g. high price leads to reduction of quantity demanded

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5
Q

What factors of demand shift/move the curve?

A
  • Price moves up and down the curve
  • Everything else shifts the curve
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6
Q

Income effect of a price change

A
  • A fall in price increases the purchasing power of customers
  • Customers can buy more with a given budget
  • Normal goods, demand rises with an increase in incomes
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7
Q

Substitution effect of a price change

A
  • Fall in price of good X makes it cheaper compared to substitutes
  • customers will switch to good X leading to higher demand
  • depends on whether products are close to substitutes
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8
Q

What is supply?

A

Quantity of a good/service, a producer is willing and able to supply onto the market at a given price in a given period of time

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9
Q

What is the basic law of supply?

A

As the price of a product rise, so a business expands supply to the market

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10
Q

Effect of a rise in the market price on suppliers

A

Brings about an expansion of supply - producers are responding to the profit motive

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11
Q

Main causes of change in supply

A
  • Cost of production
  • External shocks
  • New technology
  • Taxation and subsidies
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12
Q

The affect of costs of production
High
Low

A
  • higher unit costs cause an inward shift of supply
  • Lower unit costs mean by the business can supply more at each price
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13
Q

What is a subsidy?

A

Any form of government support, financial, or otherwise, offered to producers and consumers

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14
Q

What is equilibrium in the market?

A

Means balance between market demand and market supply

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15
Q

What are points of disequilibrium?

A

were demand and supply are out of balance/ not equal

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16
Q

What can disequilibrium in the market lead to?

A
  • excess demand
  • Excess supply
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17
Q

What is excess demand?

A

If the price charged in a market is below the equilibrium price, supply and demand will not be equal
Is there is excess demand, this means there is a shortage of goods in the market.

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18
Q

What is excess supply?

A

If the price is above the equilibrium price again, supply and demand are not equal
This time there is excess supply , which means that goods would remain unsold

19
Q

What is elasticity?

A

Measures the responsiveness of demand to a change in a relevant variable
E.g. price income

20
Q

What is PED?

A

Price elasticities of demand measures the extent to which the quantity of a product demanded changes in response to a change in price

21
Q

PED formula

A

% change in quantity demanded/ % change in price

22
Q

Value of PED
Price elastic

A

More than one
Change in demand is more than change in price

23
Q

Value of PED
Price inelastic

A

Less than one
Change in demand is less than change in price

24
Q

Value of PED
Unitary price elasticity

A

Exactly = one
Change in demand = change in price

25
Q

What is the effect of a price elastic good?

A

Change in price will cause a larger change in demand
- Overall revenues would increase with a price cut
- Overall revenues would fall with a price increase

26
Q

What is the effect of a price inelastic good?

A

Change in price will cause a smaller change in demand
- Overall revenues would decrease with a price cut
- Overall revenues would rise with a price increase

27
Q

Factors influencing PED

A
  • Brands strength
  • Necessity
  • Habit
  • Availability of substitutes
  • Time
28
Q

How does brand strength influence PED?

A

Products with strong, brand, loyalty and reputation tend to be price inelastic

29
Q

How does necessity influence PED?

A

The more necessary, a product more demand tends to be inelastic

30
Q

How does habit influence PED?

A

Products that are demanded and consumed, as a matter of habit tend to be price inelastic

31
Q

How does Time influence PED?

A

In the short run, price changes tend to have less impact on demand than over longer period

32
Q

How does availability of substitutes influence PED?

A

Demand for products that have lots of alternatives (substitutes) tend to be price elastic

33
Q

Examples of products that are price elastic

A
  • luxury holidays
  • coffees
  • jewellery
34
Q

Examples of products that are price inelastic

A
  • Tobacco
  • Train tickets
35
Q

Price elastic demand curve relationship

A

Larger change of demand with a change of price

36
Q

Price inelastic demand curve relationship

A

Small change of demand with a change of price

37
Q

What is income elasticity of demand?

A

Measures the extent to which the quantity of a product demanded is affected by change in income

38
Q

Income elasticity of demand formula

A

% change in quantity demanded/ % change in income x 100

39
Q

Income elasticities of demand on most normal products

A
  • a rise in consumers income will result in a rise in demand (positive relationship)
  • A fall in consumer income will result in a fall in demand
40
Q

Income, elasticities of demand on a luxury

A
  • Income elasticities is more than one
  • As income grows, proportionally more is spent on luxuries
    E.g. Holidays, branded goods
41
Q

Income, elasticities of demand on a necessity?

A
  • Income, elasticity, less than one, but more than zero
  • as income grows, proportionally less is spent on necessities
    E.g. staple groceries = milk, own label goods
42
Q

What happens to inferior goods (income elasticity less than one) as income rises

A

Demand falls
- Consumers switch to better alternatives
- Substitute products become affordable

43
Q

Limitations of calculating and using elasticities

A
  • can be difficult to get reliable data
  • Other factors affect demand (e.g. consumer tastes)
  • Many markets subjected to rapid technological change - make previous data, less reliable
  • Competitors will react - pricing decisions can’t be taken in isolations
44
Q

Positives of elasticity

A
  • Provides useful insights for management in decision-making
  • Firms tend to like to have products with inelastic demand
  • Building, strong brands and product, USP is a good strategy for making demands more price inelastic

Business A Level (12 decks)

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