1.2 the market Flashcards
what is demand?
the amount of a product that consumers are willing and able to purchase at a given price
why is demand important?
it affects the attractiveness of a market and the potential for sales
what is the y & x axis on a supply graph?
y axis = price
x acid = quantity demanded
acronym for drawing a supply and demand graph:
A - axes
C - curves
E - equilibrium
what way does the demand curve slope and why?
downwards, because the quantity demanded is lower at a higher price
which factors affect demand?
-price of substitute products
-price of complementary products
-seasonality
-external shocks
-demographics
-advertising and branding
-fashion, tastes and preferences
-changes in customer incomes
price of substitute products
if a supermarket own-brand version of a branded item has a lower price this will affect demand of the branded item
seasonality
variations in demand that correspond with changes in season
(eg: demand for christmas trees increases in winter)
external shocks
(+ examples)
factors beyond the control of a business
examples:
-arrival of a competitor in the market; government legislation; economic climate; social factors (increase in social media, concern for the environment)
price of complementary products
-sometimes products are bought together, such as burgers and tomato ketchup
-if the price of burgers goes down then more ketchup might be bought
demographics
the make up of a population (eg: more women than men) will influence the demand for certain goods
advertising and branding
if there is a successful advertising campaign the demand for some items might go up
changes in consumer incomes
if salaries go up then the demand for eating out or holidays (normal goods) will go up but the demand for public transport (inferior goods) decreases
fashion, tastes and preferences
will increase sales in certain items, such as types of cars, clothing, types of foods
(trends = long term)
(fashions = short term)
what does a shift the demand curve to the right mean?
demand increases
what is supply?
the amount of a product that suppliers will offer to the market at a given price
the higher the _______ of a particular good or service the more that will be supplied to the market
price
where does supply slope and why?
upwards:
as a product’s price rises, the business would tend to be more willing to make it.
does supply change in all cases?
in some cases, supply will not change no matter what the price is (eg: the number of seats at a concert)
factors affecting supply
-external shocks
-changes in the costs of production
-new technology
-indirect taxes
-government subsidies
examples of changes in cost of production:
wages, raw materials, energy, rent and machinery
government subsidies & supply:
A subsidy is an amount of money given directly to firms by the government to encourage production → if the government offer a subsidy to firms, this will reduce their per unit cost of production and increase supply
what is indirect tax?
charged on producers of goods and services and is paid by the consumer indirectly (eg: VAT)
what does a shift to the right on a supply curve mean?
increase in supply
how is the price in a market set?
-where the wishes of consumers are matched exactly with those of producers (equilibrium)
↳ where supply and demand meet
what causes surplus/excess supply? (in relation to price)
not be enough willing buyers (when price rises)
what causes shortage of supply/excess demand? (in relation to price)
many buyers would be happy to purchase goods at a lower price, however not enough is produced
at prices below the equilibrium excess _______ exists
demand
at prices above the equilibrium excess _______ exists
supply
what is price elasticity of demand?
responsiveness of quantity demanded to a change in price
what does a steep demand curve represent?
a price inelastic product
what does a flat demand curve represent?
a price elastic product
what does a price increase do to a price elastic product?
leads to a bigger percentage decrease in quantity demanded than the percentage change in price → revenues fall
what does a price increase do to a price inelastic product?
leads to a smaller percentage decrease in quantity demanded than the percentage change in price
what does a price decrease do to a price inelastic product?
leads to a smaller percentage increase in quantity demanded than the change in price
what does a price decrease do to a price elastic product?
leads to a bigger percentage increase in quantity demanded than the percentage change in price → revenues rise
how to calculate PED
percentage change in quantity demand/percentage change in price
what is an elastic PED?
(value)
a PED above 1
what is a inelastic PED?
(value)
below 1
what to ignore while calculating PED
the negative sign
how does having a price inelastic product impact decision making about profits?
may raise prices to increase revenue
how does having a price elastic product impact decision making about profit?
lowering prices could significantly increase the quantity demanded, boosting sales revenue, as long as competitors don’t react
which factors affect PED?
-number of substitutes/competitors
-costs of switching to another product
-extent to which the product is considered a necessity
-perceived value of the brand
what is income elasticity of demand?
the responsiveness of demand to a change in income
what does an income elastic demand mean?
a percentage change in incomes would lead to a proportionate or greater percentage change in the quantity demanded
examples of products with income elastic demand:
cars, TVs, holidays, clothing
(normal goods)
normal goods
-an increase in incomes leads to an increase in the quantity demanded
-have a positive income elasticity of demand
what does an income inelastic demand mean?
(+ which products are these?)
-a percentage change in incomes will lead to a proportionately lower change in the quantity demanded
-these products might be considered necessities
inferior goods
-an increase in incomes will lead to a fall in demand/a decrease in incomes will lead to an increase in demand
-have a negative income elasticity of demand
how to calculate income elasticity of demand
percentage change in quantity demanded/percentage change in income
a YED above 1 is…
income elastic demand
a YED below 1 is…
income inelastic demand
how does inelastic income elasticity of demand affect decision making?
-businesses selling goods that have income inelastic demand are likely to find demand, and therefore sales, more stable during economic shifts
-it should use economic factors to help plan for changes in production
how does elastic income elasticity of demand affect decision making?
-businesses that sell goods with high income elasticity will be affected by the cyclical nature of the economy
-in a recession, demand will fall significantly for products that have a high income elasticity of demand
-it should use economic factors to help plan for changes in production (eg: a supermarket stocking luxury products with a high YED may switch to value brands with a lower YED or even inferior goods)
factors influencing income elasticity of demand:
-whether the product is considered a necessity or luxury
-the price relative to people’s incomes (%) -> (the YED of a chocolate bar is relatively inelastic as it costs a small percentage of most people’s income)
