B5-Market Influence on Business Strategies Flashcards
Market Influence on Business Strategies
- Demand Curve*
- Quantity Demand*
Demand Curve
The demand curve illustrates the maximum quantity of a good that consumers are willing and able to purchase at each and every price (at a given price), all else being equal. Note that the demand curve is similar to the aggregate demand curve, except that the x-axis here is quantity and not real GDP
Quantity Demanded
Is defined as the quantity of a good (or service) individuals are willing and able to purchase at each and every (given) price, all else being equal.
Market Influence on Business Strategies
Fundamental Law of Demand
Reasons Price and Qty Demand Inversely related
- Substitution Effect*
- Income Effect*
Fundamental Law of Demand
States that the price of a product (or service) and the quantity demanded of that product are inversely related.
Reasons Price Price and Qty Demanded are inversely related
1. Substitution Effect
fact that consumers purchase more (less) of a good when its price falls (rises) in relation to the price of other goods.
- Income Effect
as prices are lowered with income remaining constant, people will purchase more of all lower-priced products.
Market Influence on Business Strategies
Factors that Shift Demand Curve
(WRITEN)
- Changes in Wealth
- Changes in the prices of Related goods
- Compliments-if pc $ falls, demand for peripherals increases
- Substitutes-if the price of a similar good increases (subsitute), the demand for the original good will shift to the right.
- Changes in Consumer Income
- Changes in Consumer Tastes or Preferences for a Product
- Changes in Consumer Expectations
- Changes in the Number of buyers served by the Market
Market Influence on Business Strategies
Fundamental Law of Supply
The fundamental law of supply states that price and quantity supplied are positively related.
Market Influence on Business Strategies
Factors that shift Supply Curve
- Changes in Price Expectations of the Supplying Firm
- If $ are expected to decrease, the firm will supply more now at each price level to take advantage of the currently higher prices
- Changes in Production Costs
- Changes in the prices of inputs (minimum wage increases-supply decreases
- Changes in the Price or Demand for Other Goods
- a dec (inc) in the demand for another good supplied by a firm would cause the firm to shift its resources and increase(dec) the supply of its remaining goods.
- Changes in Subsidies or Taxes
- a dec in taxes or inc in subsidies would inc the amount supplied at each price leve.
- Changes in Production Technology
- an improvement in technology would cause a shift to the right of the supply curve.
Market Influence on Business Strategies
Market Equilibrium
A market is in equilibrium when there are no forces acting to change the current price/quantity combination. The market supplies just as much as is demanded and there is no pressure to change prices.
- The market’s equilibrium price and output (quantity) is the point where the supply and demand curves intersect. This is sometimes called the market clearing price.
Market Influence on Business Strategies
Market Equilibrium
Price Floor
Surplus or Shortage?
Results in Surplus
If the price is set above the equilibrium price, the quantity demanded will be less than the quantity supplied, and a surplus will result.
A price floor is a minimum price set above the equilibrium price, which causes surpluses to develop. Price floors are minimums prices established by law, such as minimum wages and agricultural price supports.
Market Influence on Business Strategies
Market Equilibrium
Price Ceiling
Surplus or Shortage?
Results in Shortage
if the price is set below the equilibrium price, the quantity demanded will exceed the quantity supplied and a shortage will result.
A price ceiling in a maximum prices that is established below the equilibrium price, which causes shortages to develop, Price ceilings cause prices to be articficially low, creating a greater demand than the supply available.
Market Influence on Business Strategies
Market Equilibrium
Effects of Changes in Demand And Supply on Equilibrium
Change in Demand__Change in Supply Eff on Equil Qty Eff on Equilib Qty
- Increase Increase Increase Indeterminate*
- Increase Decrease Indeterminate Increase*
- Decrease Decrease Decrease Indeterminate*
- Decrease Increase Indeterminate Decrease*
Market Influence on Business Strategies
Elasticity of Demand and Supply
Price Elasticity of Demand
The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.
Ep = % change in quantity demanded
% change in price
Any number less than 1 is inelastic and any number greater than 1 is elastic.
Market Influence on Business Strategies
Elasticity of Demand and Supply
Market Influence on Business Strategies
Elasticity of Demand and Supply
Price Inelasticity
absolute price is < 1.0
Market Influence on Business Strategies
Elasticity of Demand and Supply
Factors Affecting Price Elasticity of Demand
- Product demand is more elastic with more substitutes available but is inelastic if few substitues are available. (Demand for soft drinks and fast food restaurant meals are price elastic. Purveyors of those products must be careful in raising their prices
- The longer teh time period, the more product demand becomes elastic b/c more choices are available.
Market Influence on Business Strategies
Elasticity of Demand and Supply
Unit Elasticity
absolute price elasticity of demand = 1.0
Market Influence on Business Strategies
Elasticity of Demand and Supply
Price Elasticity Effects on Revenue
