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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
What is the effect of a price elastic good?
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
What is the effect of a price inelastic good?
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
Factors influencing PED
- Brands strength - Necessity - Habit - Availability of substitutes - Time
28
How does brand strength influence PED?
Products with strong, brand, loyalty and reputation tend to be price inelastic
29
How does necessity influence PED?
The more necessary, a product more demand tends to be inelastic
30
How does habit influence PED?
Products that are demanded and consumed, as a matter of habit tend to be price inelastic
31
How does Time influence PED?
In the short run, price changes tend to have less impact on demand than over longer period
32
How does availability of substitutes influence PED?
Demand for products that have lots of alternatives (substitutes) tend to be price elastic
33
Examples of products that are price elastic
- luxury holidays - coffees - jewellery
34
Examples of products that are price inelastic
- Tobacco - Train tickets
35
Price elastic demand curve relationship
Larger change of demand with a change of price
36
Price inelastic demand curve relationship
Small change of demand with a change of price
37
What is income elasticity of demand?
Measures the extent to which the quantity of a product demanded is affected by change in income
38
Income elasticity of demand formula
% change in quantity demanded/ % change in income x 100
39
Income elasticities of demand on most normal products
- 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
Income, elasticities of demand on a luxury
- Income elasticities is more than one - As income grows, proportionally more is spent on luxuries E.g. Holidays, branded goods
41
Income, elasticities of demand on a necessity?
- 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
What happens to inferior goods (income elasticity less than one) as income rises
Demand falls - Consumers switch to better alternatives - Substitute products become affordable
43
Limitations of calculating and using elasticities
- 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
Positives of elasticity
- 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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