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Economics Theme 1 (Markets, Consumers & Firms) > 1.3 (Introducing the market) > Flashcards

1.3 (Introducing the market) Flashcards

1
Q

1.3.1
What is demand?

A

the willingness and ability of a consumer to buy goods and services at a specific price

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2
Q

What happens to the demand curve if demand increases?

A

The curve shifts up and to the right

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3
Q

What happens to the demand curve if demand decreases?

A

The curve shifts down and to the left

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4
Q

Reasons for changes in demand (PASIFIC)

A

Population increase
Advertising increase
Substitute goods increase in price
Income increases
Fashion/trends
Interest rates decrease
Complementary goods decrease in price

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5
Q

What are normal and inferior goods?

A

Normal= as income rises demand rises
Inferior= as income rises demand falls

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6
Q

What is a demographic?

A

statistics about a population showing data

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7
Q

What is income?

A

money earned often from wages/salaries

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8
Q

What is a substitute good?

A

alternative products often provided by competitors

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9
Q

What is a complementary good?

A

products which tend to be used together

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10
Q

What is income elasticity?

A

The sensitivity of demand for a certain good to a change in the real income of consumers who buy that good

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11
Q

What is price inelastic?

A

The static quantity demanded of a good or service when its price changes

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12
Q

What causes movement along the demand curve and a shift in the demand curve?

A

Movement along = price changes

Shift= any factor other than price changes

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13
Q

What is demand curve contraction and expansion?

A

Contraction= price rises and quantity falls (up the curve)
Expansion = price falls and quantity rises (down the curve)

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14
Q

What are demand schedules and what are they used for?

+what is used to make these

A

A table that shows the quantity demanded of a good or service at different price levels.

Used to predict the earnings a particular product or company might make

+ demand curves

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15
Q

How is effective demand different from demand?

A

Demand = willingness to buy
Effective demand = willingness and ability to buy

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16
Q

What is a logical/rational consumer?

A

A consumer who will (in theory) make choices that bring the most satisfaction possible from their limited income

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17
Q

What is customer sovereignty?

A

the situation in an economy where the desires and needs of consumers control the demand and therefore the output of producers

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18
Q

1.3.2
What is supply?

+ what happens to this if price rises?

A

The quantity of a good or service that producers are willing and able to supply at a given price

+ the supply will rise

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19
Q

What causes movement along the supply curve?

What causes a shift in the supply curve?

A

A change in price

When there is a change in a factor other than price

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20
Q

What happens to the supply curve when price increases/ decreases?

A

Increase= move along supply curve (extension)
Decrease= move down the supply curve (contraction)

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21
Q

Which way does the supply curve shift when a non-price factor causes the supply to :
- increase?
- decrease?

A

Increase= to the right
Decrease= to the left

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22
Q

Which factors other than price can cause a shift in the supply curve? (PINTSWC)

A

Productivity
Indirect tax
Number of firms entering/leaving the market
Technology
Subsidies
Weather
Cost of production

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23
Q

What are subsidies?

A

sums of money given to producers usually by the government to encourage supply

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24
Q

What happens to supply if a factor besides price or quantity changes?

A

a new supply curve must be drawn (once this is created other determinants can be added)

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25
Q

What is an external shock?

+ what is sustainability?

A

An occurrence beyond a firm’s control which may affect costs

+ the ability to maintain or support a process continuously over time

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26
Q

What is the long run and what is the short run?

A

Long run: a situation where all the factors of production and costs are variable. (Allows firms to operate and adjust costs)

Short run: within a certain period in the future, at least one input is fixed while the others are variable

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27
Q

What is direct and indirect tax?

+ (e.gs of each)

A

Direct: levied directly on individuals or entities based on their income, wealth or property (e.g property tax & income tax)

Indirect: imposed on the consumption of goods and services. It is collected by intermediaries (e.g businesses) but ultimately paid by the end consumer (e.g VAT & sales tax)

28
Q

1.3.3
What is equilibrium?

A

when the forces of supply and demand are balanced

29
Q

What is excess supply

+what does it cause?

A

At any price above the equilibrium level supply exceeds demand

+ this causes firms to reduce prices top sell surplus stock

30
Q

What is excess demand and what does it cause?

A

At any price below the equilibrium price demand exceeds supply that suppliers can or will supply

+ this causes firms to increase prices and supply more

31
Q

What happens at equilibrium price?

+ what does this mean?
+ why doesn’t this last long?

A

‘market clearing’

+ the amount sellers wish to sell just balances with the amount demanded by consumers

+ market forces will lead to a change in price

32
Q

What causes a shift in the equilibrium price?

A

A change in any of the non-price determinants of supply or demand as this shifts one of the curves therefore causing a new equilibrium and quantity

33
Q

What should a decrease in supply lead to (equilibrium)?

A

A rise in price but a fall in quantity. This would lead to a fall in quantity demanded.

34
Q

What could an increase in demand lead to (equilibrium)?

A

Encourages firms to produce more and so supply increases

35
Q

What is price stickiness?

What is price volatility?

A

The resistance of a market price to change quickly despite shifts in the broad economy (cost of producing/selling goods)

Price fluctuations of a commodity

36
Q

Why are some prices sticky?

+ Why are some prices volatile?

A
  • long-term contracts
  • cost of adjusting prices
  • expectations of consumers & firms

+ supply is inelastic in the short run
+ demand is inelastic in the short run
+ supply influenced by weather/nature
+ speculation of investors

37
Q

What are the limitations to our price determination model?

A
  • We rely on the ‘ceteris paribus ‘ assumption
  • We assume that supplying businesses are motivated simply by profit & competition causes them to react in predictable ways
  • Regulated markets
  • Non-capitalist price systems
  • Firms can’t always be confident about the shape of the curve and whether its changing
38
Q

1.3.4 What is the price mechanism?

A

The system where the forces of demand & supply determine the prices of commodities and the changes therin. It is the buyers & sellers who actually determine the price of a commodity.

39
Q

What was Adam Smith’s price mechanism metaphor?

+ what does the price mechanism encourage?

A

‘the invisible hand of the market’
- unseen forces that move the free market economy

Growth & progress

40
Q

What happens through the price mechanism?

+ How does this work?

A

Resources are allocated and the economic problem is solved.

+ the price moves resources to where they are demanded or where there is a shortage & removes where there is a surplus

41
Q

What 3 ways does the price mechanism use to allocate resources?

A

1) Signalling: the price acts as a signal to consumers & firms (shows where resources are needed & which markets to enter/leave)

2) Incentives: this encourages a change in behaviour of a consumer or producer (e.g high price would encourage producers to supply more)

3) Rationing: when there are scarce resources, price increases due to excess demand

42
Q

What is the reality of the price mechanism?

A

It is due to the outcome of free play of market forces but sometimes the government controls the price mechanism to make commodities available to poorer people

43
Q

What is the scale of markets idea?

A

That the price mechanism fulfills the same function in any market (local, national, global). But the results can vary as each market will reflect the different conditions of demand and supply leading to different outcomes.

44
Q

What is a niche market?

+ example and what it may include?

A

When a firm targets a small subsection or previously unexploited gap in a larger market

Example: eco-friendly cleaning products
- may have specialised packaging, branding and marketing messages that speak directly to the niche audience

45
Q

Positives and Negatives of niche markets

A

+ less competition
+ brand loyalty
+ best for giving marketing insight
+ targeted marketing
+ often charge higher prices due to first mover advantage

  • limited growth potential
  • lack economies of scale
  • vulnerable to fluctuations in demand
  • can attract large competition if lucrative
46
Q

What is a mass market?

+ example and what it may include?

A

when a firm targets the whole of a market rather than a particular segment (often needs rather than wants)

Example: cleaning products
- designed to be affordable, widely available, with packaging that is easily recognisable & appealing to a wider audience

47
Q

Positives and Negatives of mass markets

A

+ large customer base
+ economies of scale
+ brand recognition

  • more competition
  • less personalisation
  • lower profit margin (low price is crucial)
48
Q

Examples of growing and declining markets and why

A

+ Cyber Security (12.3% annual growth)
companies holding more data in tech
more technology

+ Renewable Energy (17.2%)
depletion of fossil fuels
more environmentally aware society

+ Video Streaming (21.5%)
more convenient
people want a wider range of choice
COVID

  • Global Cargo Airlines (-17.3%)
    switch to cargo boats (can transport more)
    less need for quick travel of products
    increase in flight prices
49
Q

What are price ceilings and price floors?

A

1) ceiling= maximum legal price (below equilibrium)
2) floor= minimum legal price (above equilibrium)

50
Q

1.3.5 What is primary research?

+ Pros and cons

A

Research data that is collected first hand for a specific research purpose. Involves going directly to the source to ask questions (e.g interviews & surveys)

+ up to date & more accurate
+ relevant to objectives

  • time-consuming
  • expensive
51
Q

What is secondary research?

+ pros and cons

A

Uses data that already exists and has been collected by someone else for another purpose. Can be externally or internally sourced.

+ much cheaper
+ quick/easy access

  • less relevant
  • less accurate
52
Q

What is quantitative research?
+ pros and cons

What is qualitative research?
+ pros and cons

A

strategy which focuses on the collection and analysis of data (numerical) e.g multi-choice questionnaires
+ faster and easier
- limited answers

method of gathering and analysing non-numerical data to understand consumer behaviour and improve customer experiences e.g open-ended questions
+ explores in depth
- sample-size issue

53
Q

What are the 5 types of sampling methods?

How are they done?

(consider P & N about each)

A

Random sampling
Stratified sampling
Systematic sampling
Non-random sampling
Capture-Recapture

54
Q

Why is market research needed for businesses?

A
  • it can give an accurate view of your business & your marketplace
  • can help you decide if a new product will be successful
  • helps you make wise product packaging & promotional decisions
  • helps you see if you are meeting consumer needs
55
Q

What is the purpose of market research?

A
  • quantifies potential demand
  • understand how much consumers are willing to spend
  • understand customer behaviour
  • study competitors & understand their USPs
  • identify key features of business environment
56
Q

3 Limitations of market research

A

1) can be difficult in foreign markets
2) some markets change rapidly
3) sometimes managers make decisions without fully understanding the research

57
Q

What is market segmentation?

+ what are the benefits of this?

(which market types use this?)

A

a way of splitting prospective buyers into groups with common needs and who respond similarly to a marketing action

+ customer retention
+ increased profitability
+ design more effective marketing
+ optimal product planning & development

(both niche and mass markets)

58
Q

1.3.6 What is market mapping? What does it do?

Examples of types of market mapping criteria

A

process of using a graph to plot competitors and their products to understand competitor behaviour & spot gaps in the market

price & quality
duration
taste
budget
gender

59
Q

Pros and Cons of market mapping

A

+ helps identify gaps
+ identifies where market is overcrowded
+ identifies where the firm is over reliant on one sector

  • a gap may mean there is no demand for it
    (this may mean further market research is needed)
60
Q

What is market positioning? (What is the aim of this?)

+ what is competitive advantage? (what are ways of seeking this?)

A

the ability to influence customer perception of a brand or product relative to competitors (establish an image or identity)

+ having an edge over rival products (market mapping & positioning)

61
Q

Sources of competitive advantage

+ what is product differentiation?

A
  • reliability
  • customer service
  • extra features
  • uniqueness
  • lower price

+ unique characteristics that distinguish a product from its rivals

62
Q

What are market position and competitive advantage less relevant to?

+ 4 Sources of product differentiation

A

Commodity products where everyone is selling them e.g petrol

+ differences in quality
+ differences in functional features/design
+ marketing by sellers
+ differences in availability

63
Q

What are the 6 pricing strategies?
(CCPPPP)

A

Competitive pricing
Cost-plus pricing
Penetration pricing
Premium Pricing
Price-skimming
Predatory pricing

64
Q

What is…

1) competitive pricing?

2) cost-plus pricing?

3) penetration pricing?

A

1) a marketing strategy whereby businesses set their prices based on their competitor’s prices

2) a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (markup) to the product

3) the price of a product is initially set low to rapidly reach a wide fraction of the market

65
Q

What is…

4) premium pricing?

5) price-skimming?

6) predatory pricing?

A

4) setting your prices higher than the competition, banking on the idea that customers will pay more for perceived quality or exclusivity

5) pricing strategy in which a company starts by charging the highest price that customers will pay, and then lowers it over time

6) illegal business practice of setting prices for a product unrealistically low in order to eliminate the competition

66
Q

What are the two types of market?
+ examples of each

A

Static: where changes in the market occur infrequently & over a long-time
(+ toilet rolls & baked beans)

Dynamic: a market which is subject to continual & rapid changes. Requires innovation
(+ EVs & streaming services)

Economics Theme 1 (Markets, Consumers & Firms) (5 decks)

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