1.2 - the market Flashcards
What is demand?
Demand is the quantity of a product that consumers want and are able to buy at a given price, at a particular time.
What is supply?
Supply is the quantity of a product that suppliers are willing and able to supply to a market at a given price at a particular time.
What is a supply and demand diagram?
A supply and demand diagram plots the quantity of a product in supply or demand against a range of different prices of the product.
Its made up of two curves, one for demand and one for supply.
What does the demand curve show?
The demand curve usually slopes downwards.
It shows that as the price of a product increases the demand decreases.
What does the supply curve show?
The supply curve shows the relationship between price and quantity supplied.
The supply curve usually slopes upwards, meaning that the higher the price charged for a product, the higher the quantity supplied.
What is the equilibrium price?
Equilibrium price is when the amount demanded matches the amount supplied.
The equilibrium price and equilibrium quantity is where the 2 curves meet.
What is a surplus?
A surplus occurs when the price increases.
If the price of a product was increased, this would cause a movement to the right along its supply curve, and a movement to the left along its demand curve.
This would mean that the quantity demanded would be less than the quantity supplied, and so there would be excess supply and therefore a surplus in the market.
What is a shortage?
A shortage occurs when the price decreases.
If the price of a product was decreased, this would result in a movement to the left along its supply curve, and a movement to the right along its demand curve.
This would mean that there would be more demand than supply, and so there would be excess demand and therefore a shortage in the market.
What are the main factors that affect demand?
- Substitutes - if a substitues price is changed then it could gain more demand than the businesses product
- Complementary products - products that are used together e.g. if a printers price increased then demand for ink would also decrease
- Consumer income - higher income can lead to an increase in demand, lower income can lead to a decrease in demand
- Consumer tastes
- Advertising and branding
- Demographics - changes in population can lead to changes in demand
- Seasonal changes - demand for certain goods and services can change throughout seasons
- External shocks - these include war, diseases, extreme weather
What are the factors that can affect supply?
- Costs of production - if the cost of production for a product increases then profit made decreases, so there’ll be a fall in supply
- Indirect taxes - if taxes increase on a businesses goods then they are likely to decrease supply
- Subsidies - can increase supply due to business having more money
- New technology - can help businesses be efficient and save money leaving them with more to spend on supply
- Weather conditions - in markets such as agriculture weather has an impact on the supply
- External shocks - external shocks such as war can affect the supply of certain products
How can demand and supply curves shift?
- A rise in demand shifts the demand curve to the right
- a fall in demand sifts the demand curve to the left
- a rise in supply shifts the supply curve to the right
- a fall in supply shifts the supply curve to the left
What is price elasticity of demand?
The price elasticity demand (PED) of a product is how much the price change affects the demand.
What is the formula for price elasticity of demand?
PED = % change in quantity demanded / % change in price
How do you know whether the product is price elastic or inelastic?
If the PED is greater than 1 (ignoring minus sign) the product is price elastic.
If the PED is elss than 1, its price inelastic.
so -1.5 is price elastic and -0.5 is price inelastic
PED is always negative so you can just ignore the minus sign
What does it mean if a product is price elastic or inelastic?
if demand is price elastic this means it is sensitive to price. A fall in price leads to a bigger increase in quantity demanded.
if demand is price inelastic this means it is insensitive to price changes.
What are the factors that PED depends on?
- necessity products like milk are price inelastic, since they are always needed
- PED increases over time since customers find alternative products using the internet
- Items costing a greater proportion of customers incomes will be price elastic
- How often a customer buys a product affects PED
How does PED affect sales revenue?
if a product is price elastic, a price increase will make sales revenue go down.
If a product is price inelastic, a rise in price will make sales revenue go up
What is income elasticity of demand (YED)?
Income elasticity of demand shows how demand changes with income.
What is the formula for income elasticity of demand (YED)?
YED = % change in quantity demanded / % change in income
What does the income elasticity of demand of a product depend on?
the YED of a product depends on whether the product is a normal product (a necessity or luxury product) or an inferior product.
Normal products have a positive income elasticity of demand.
Inferior products have a negative income elasticity of demand.
What are normal, luxury, inferior products?
- Normal products - fruit and vegetables, have a positive YED meaning as income rises demand increases
- Luxury products - designer clothes, have a positive YED meaning demand grows faster than the increase in income
- Inferior products - cheaper value products such as a cheaper supermarket own brand, have a negative YED meaning demand falls when incomes rises.
How does elasticity help a business make choices?
Price elasticity helps a business decide whether to raise or lower the price of a product.
They can see what might happen to the sales, and ultimately what will happen to sales revenue.
