1.2 -the market

Question 1

demand

Answer 1

the amount of a product that consumers are willing and able to purchase at any given price

Question 2

how are price and demand related?

Answer 2

• price increases = demand decreases
• price decreases = demand increases
• negative or inverse relationship (one increases the other decreases)

Question 3

non-price factors of demand

Answer 3

• 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

Question 4

other factors of demand

Answer 4

• income
• social changes
• technological change
• government legislation
• effectiveness of advertising
• expectations

Question 5

supply

Answer 5

the amount suppliers (producers) wish to sell over a range of prices within a time period

Question 6

revenue

Answer 6

selling price x quantity sold

Question 7

price elasticity of demand

Answer 7

measures how responsive demand is to changes in price

Question 8

price elasticity of demand formula

Answer 8

% change in quantity demanded/% change in price

Question 9

inelastic demand curve

Answer 9

when a percentage change in price results in a proportionally smaller percentage change in demand

Question 10

elastic demand curve

Answer 10

when a percentage change in price results in a proportionally larger percentage change in demand

Question 11

elastic goods and services

Answer 11

• plenty of substitutes
• price increases = quantity demanded rapidly drops
• examples = furniture, motor vehicles

Question 12

inelastic goods and services

Answer 12

• few substitutes
• price changes don’t affect demand
• examples = gas, electricity, water, clothing, food

Question 13

price elasticity of demand formula

Answer 13

% change in quantity demanded/% change in price

Question 14

percentage change formula

Answer 14

change/original x 100

Question 15

if PED = 0

Answer 15

demand is perfectly inelastic (demand never changes)

Question 16

if PED is between 0 and 1

Answer 16

demand is inelastic

Question 17

if PED = 1

Answer 17

demand is unit elastic (change in demand is exactly the same as the change in price)

Question 18

if PED is greater then 1

Answer 18

demand responds more proportionately to change in price

Question 19

how PED can be used

Answer 19

• 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

Question 20

income elasticity

Answer 20

measures the responsiveness of demand to a change in income

Question 21

income elasticity of demand formula

Answer 21

% change in quantity demanded/% change in income

Question 22

how YED is useful to businesses

Answer 22

can calculate the effect on demand when there is a change in consumer income

Question 23

normal goods

Answer 23

• income elasticity will have a positive sign
• income increases, demand increases

Question 24

inferior goods

Answer 24

income elasticity will have a negative sign
- income decreases, demand increases

Question 25

if YED is lower than -1

Answer 25

inferior goods
elastic

Question 26

if YED is between 0 and -1

Answer 26

inferior goods
inelastic

Question 27

if YED is between 0 and 1

Answer 27

normal goods
inelastic

Question 28

if YED is higher than 1

Answer 28

luxury goods
elastic

Question 29

importance of income elasticity to businesses

Answer 29

important tool in decision making