1.2 - the market Flashcards
What factors lead to a change in demand?
- changes in the prices of substitutes and complementary goods
- changes in consumer incomes
- fashions, tastes and preferences
- advertising and branding
- demographics
- external shocks
- seasonality
These factors influence the effective demand for products and services.
What is effective demand?
Desire backed by readiness to pay at a particular price.
Effective demand is determined by various factors, not just price.
What factors lead to a change in supply?
- changes in the costs of production
- introduction of new technology
- indirect taxes
- government subsidies
- external shocks
These factors impact the amount that producers can supply at a given price.
How is supply determined?
Supply is determined by price, which incentivizes businesses to supply more in anticipation of higher profits.
This relationship influences business output and pricing strategies.
What is the market clearing price?
The equilibrium price in a market where demand and supply are equal.
At this price, there is no surplus or shortage.
What happens when demand exceeds supply?
A shortage occurs, often due to low prices.
This situation can lead to price increases.
What happens when supply exceeds demand?
A surplus occurs, often due to high prices.
This situation can lead to price decreases.
What does a shift of the demand curve to the right indicate?
A rise in demand, leading to a shortage at the current price.
This typically results in an increase in price and equilibrium quantity.
What does a shift of the supply curve to the left indicate?
A fall in supply, leading to a shortage at the current price.
This typically results in an increase in price and a decrease in equilibrium quantity.
What is price elasticity of demand (PED)?
Measures the responsiveness of demand to a change in price.
PED is calculated as the percentage change in quantity demanded divided by the percentage change in price.
What does a steep demand curve indicate?
A product with price inelastic demand.
Demand is not responsive to price changes.
What does a shallow demand curve indicate?
A product with price elastic demand.
Demand is responsive to price changes.
What factors influence price elasticity of demand (PED)?
- availability of substitutes
- frequency of purchase
- relative price/expense
- whether the product is a luxury or necessity
- time
These factors determine how sensitive demand is to price changes.
How does PED affect total revenue when PED is inelastic?
A rise in price increases total revenue; a fall in price reduces total revenue.
This is crucial for pricing strategies.
What is income elasticity of demand (YED)?
Measures the responsiveness of demand to a change in income.
YED is calculated as the percentage change in quantity demanded divided by the percentage change in income.
What does a positive YED indicate?
The product is normal.
This means demand increases as income rises.
What does a negative YED indicate?
The product is inferior.
This means demand decreases as income rises.
What influences YED?
- whether the product is a luxury, necessity, or inferior good
- expectations of changes in income
These factors help businesses understand market demand dynamics.
How can businesses respond to trends in YED?
By diversifying their product range to include goods with positive YED during periods of income growth.
This helps maintain sales levels.
