1.2 -the market Flashcards
demand
the amount of a product that consumers are willing and able to purchase at any given price
how are price and demand related?
- price increases = demand decreases
- price decreases = demand increases
- negative or inverse relationship (one increases the other decreases)
non-price factors of demand
- the price of substitutes
- alternative brands
- the 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
other factors of demand
- income
- social changes
- technological change
- government legislation
- effectiveness of advertising
- expectations
supply
the amount suppliers (producers) wish to sell over a range of prices within a time period
revenue
selling price x quantity sold
price elasticity of demand
measures how responsive demand is to changes in price
price elasticity of demand formula
% change in quantity demanded/% change in price
inelastic demand curve
when a percentage change in price results in a proportionally smaller percentage change in demand
elastic demand curve
when a percentage change in price results in a proportionally larger percentage change in demand
elastic goods and services
- plenty of substitutes
- price increases = quantity demanded rapidly drops
- examples = furniture, motor vehicles
inelastic goods and services
- few substitutes
- price changes don’t affect demand
- examples = gas, electricity, water, clothing, food
price elasticity of demand formula
% change in quantity demanded/% change in price
percentage change formula
change/original x 100
if PED = 0
demand is perfectly inelastic (demand never changes)
if PED is between 0 and 1
demand is inelastic
if PED = 1
demand is unit elastic (change in demand is exactly the same as the change in price)
if PED is greater then 1
demand responds more proportionately to change in price
how PED can be used
- can predict the effect of a change in price on total revenue & expenditure on a product
- predict likely volatility in a market
- predict the effect of a change in an indirect tax on price and quantity demanded
- used as part of a policy of price discrimination
income elasticity
measures the responsiveness of demand to a change in income
income elasticity of demand formula
% change in quantity demanded/% change in income
how YED is useful to businesses
can calculate the effect on demand when there is a change in consumer income
normal goods
- income elasticity will have a positive sign
- income increases, demand increases
inferior goods
income elasticity will have a negative sign
- income decreases, demand increases
