1.2 The Market

Question 1

Demand

Answer 1

Demand shows the amount of goods or services that a consumer is willing and able to buy at a given price over a period of time

Question 2

Substitutes

Answer 2

A substitute product acts as an alternative to another good, therefore creating competition e.g. Coca-Cola and Pepsi Cola. If the price of good A increases, the demand for good B will increase and vice versa (There is a positive correlation)

Question 3

Complementary goods

Answer 3

Goods that are bought alongside each other as they complement each other e.g. fish and chips, games and games console. If the price of good A increases, the demand for good B will decrease (There is a negative correlation)

Question 4

Disposable income

Answer 4

Disposable income is income after taxes e.g. take home pay

Question 5

Discretionary income

Answer 5

Discretionary income is after all necessary payments have been made e.g. insurance and mortgage

Question 6

Advertising

Answer 6

A promotional method that involves the use of media to communicate with existing and potential consumers

Question 7

Branding

Answer 7

A promotional method that involves the creation of an identity for the business that distinguishes the firm and its products from other firms

Question 8

External shocks

Answer 8

External shocks are unexpected events that are outside of the businesses control but have a direct impact on the level of demand or ability to supply

Question 9

Seasonality

Answer 9

A market that experiences peaks and troughs in terms of sales volume based upon the time of year

Question 10

Supply

Answer 10

Supply shows the amount of goods or services that a business is willing and able to sell at a given price over a period of time

Question 11

Costs of production

Answer 11

The expenditure incurred by a business when producing goods or services from factor inputs such as land labour capital and enterprise

Question 12

Indirect taxes

Answer 12

Indirect taxes are charges , by the government, placed on goods and services produced by individuals and firms e.g. Value added tax (VAT), Duties

Question 13

Government subsidies

Answer 13

Financial assistance given to individuals, firms and industries to provide a good or a service

Question 14

Equilibrium

Answer 14

Where demand for a product is equal to the supply of that product (D = S)

Question 15

Price elasticity of demand

Answer 15

A measure of the responsiveness of demand to a change in price i.e. what will happen to the demand for the product if its price changes

% change in quantity demanded / % change in price

Question 16

Total revenue

Answer 16

The total amount of money coming into a business from the sale of goods or services

Question 17

Price inelastic demand

Answer 17

The demand for a product is not very responsive to a change in price. If a product is price inelastic then a firm knows that if it raises price, even though demand will fall, total revenue should increase

Question 18

Price elastic demand

Answer 18

A change in price leads to a proportionally greater change in demand. If a product is price elastic then a firm knows that if it lowers price, demand should rise and total revenue increase

Question 19

Unitary price elasticity

Answer 19

A percentage change in price leads to an equal but opposite change in demand e.g. a 5% increase in price will lead to a 5% (equal) fall (opposite) change in demand. A change in price will not affect total revenue

Question 20

Necessities

Answer 20

A product that is essential that customers will continue to purchase even if the price is high. A reduction in the price of necessities will not necessarily encourage customers to buy more.

Question 21

Income elasticity of demand

Answer 21

A measure of the responsiveness of demand to changes in income i.e. what will happen to the demand for a product if consumers’ incomes change

% change in Quantity Demanded / % change in Income

Question 22

Income elastic demand

Answer 22

A change in income will lead to a more than proportional change in demand, luxury goods are income elastic

Question 23

Income inelastic demand

Answer 23

A change in income will lead to a less than proportional change in demand. Necessity goods are income inelastic

Question 24

Unitary income elastic

Answer 24

A percentage change in income leads to an equal but opposite change in demand e.g. a 5% increase in price will lead to a 5% (equal) fall (opposite) change in demand.

Question 25

Luxury goods

Answer 25

These are items which are very sensitive to levels of income. The sales of luxury goods will often fall at times where incomes drop