C1/H2 - Markets Flashcards
Demand?
The amount of a product that consumers are willing and able to purchase at a given price
Supply?
Supply refers to the amount of products sellers are prepared to offer at a given price
Equilibrium?
Price equilibrium is found when the quantity demanded is equal to the quantity supplied
The forces of demand and supply dictate the price of a good or service. If demand for a product exceeds supply the price would increase as businesses would take advantage or high demand. However if supply was to exceed demand this would lead to prices decreasing, this is because businesses would want to avoid a surplus so would lower the price to encourage demand and clear excess stock. When a factor causes demand or supply to change
The forces of demand and supply dictate the price of a good or service. If demand for a product exceeds supply the price would increase as businesses would take advantage or high demand. However if supply was to exceed demand this would lead to prices decreasing, this is because businesses would want to avoid a surplus so would lower the price to encourage demand and clear excess stock. When a factor causes demand or supply to change
The forces of demand and supply dictate the price of a good or service. If demand for a product exceeds supply the price would increase as businesses would take advantage or high demand. However if supply was to exceed demand this would lead to prices decreasing, this is because businesses would want to avoid a surplus so would lower the price to encourage demand and clear excess stock. When a factor causes demand or supply to change
The forces of demand and supply dictate the price of a good or service. If demand for a product exceeds supply the price would increase as businesses would take advantage or high demand.
However if supply was to exceed demand this would lead to prices decreasing, this is because businesses would want to avoid a surplus so would lower the price to encourage demand and clear excess stock.
When a factor causes demand or supply to change
Factors that affect demand
Price - If Price increases fewer people would be able and willing to purchase the product at the increased price, therefore demand would decrease. However if price was to decrease more consumers would be able and willing to purchase at the lower price therefore demand would increase.
Income - If income increases consumers would have more disposable income to spend on luxuries, therefore demand for these goods would increase. However if income levels were to decrease consumers are likely to purchase more inferior goods and fewer luxury goods
Interest rates Interest is the cost of borrowing money or the return on saving money. If interest rates increase it becomes more expensive to borrow, therefore demand for goods typically purchased on credit will decrease. This is because consumers become less willing to borrow and more focused on repaying their current debts.
Change in the price of substitutes Substitutes are alternative products or services which fulfil the same need or want. When the price of a substitute increases demand would increase as consumers would switch to the cheaper alternative.
Change in the price of compliments Complements refer to goods that are often purchased together and therefore demand is linked. This means that if the price of one of the products increases demand for both products will decrease.
Change in tastes and fashions Some products are subject to changes in tastes and fashions. Skateboards for example, were brought in huge quantities in the 1970’s. They went out of fashion for a number of years only to come back into favour again.
Change in legislation Government legislation can affect demand for a product, For example, a law requiring all cyclists to wear helmets would lead to an increase in demand for cycling helmets at a given price.
Demand Curves
The influence of factors such as price, income and advertising on demand can be illustrated on a diagram called a demand curve.
The below table shows how much bread is demanded in one shop at different prices. It is clear that demand increases as the price decreases.
Price Quantity Demanded
£2.50 25 £2.00 50 £1.50 100 £1.00 150 £0.50 200
Movements along the demand curve:
> A price increase causes a movement up the demand curve whereas a price decrease causes a movement down the demand curve.
Shifts and the demand curve:
> If anything other than price changes it will cause the demand curve to shift. If the change causes demand to increase the curve must shift to the right, if the change causes demand to decrease the curve must shift to the left.
Supply Curves
The influence of factors such as price, the weather and taxation on supply can be illustrated on a diagram called a supply curve.
The below table shows how many Mars Bars are supplied at different prices. It is clear that supply increases as the price increases, for examples suppliers are not will to supply any Mars Bars for 30p.
Price Quantity Demanded
£0.30 0 £0.40 400 £0.50 1,200 £0.60 2,000 £0.70 2,800 £0.80 3,600
Movements along the supply curve :
> A price increase causes a movement up the supply curve whereas a price decrease causes a movement down the demand curve.
Shifts and the supply curve:
> If anything other than price changes it will cause the supply curve to shift. If the change causes supply to increase the curve must shift to the right, if the change causes supply to decrease the curve will shift to the left.
Factors that affect Supply
Price -
> As price increases supply will increase
> As price decreases supply will decrease
Costs of production:
> Costs of production refers to any of the firms costs. This could be raw materials, wages, rent or marketing.
> As cost of production increase supply will decrease as firms will be less willing to supply at the given price as they would make a lower amount of profit once costs have increased.
> As cost of production decrease supply will increase as firms will be more willing to supply at the given price as they would make a higher amount of profit once costs have increased.
VAT/Corporation tax:
> VAT and corporation tax refer to taxes payable by businesses. Changes in taxes payable will mean a change in the firms overall costs which must be paid.
> Increases in tax will mean the firm’s ability to supply at a given price would fall as their profits at that price would decrease.
> Decreases in tax will mean the firm’s ability to supply at a given price would rise as their profits at that price would increase.
Subsidies:
> Subsidies refers to support or payment to businesses from the government. Usually to encourage the provision of a certain good or service.
> Increases in subsidies would increase supply as firms would be more willing to supply at a given price as they would benefit from the subsidy
> Removal or decreases in subsidies would decrease supply as firms would be less willing to supply at a given price as they would no longer benefit from the subsidy
The weather:
> The weather refers to any weather condition which affects a firm’s ability to supply a product service/ this can include hurricanes, tornados, snow, etc…
> Adverse weather often reduces a firm’s ability to supply a product as there may have been damage to products or it is not possible to provide the produce in certain weather conditions.
Improvements in technology:
> Improvements in technology refers to the firm employing more capital in the production process. This usually means the firm can produce on a larger scale and reduce unit costs.
> This should increase a firm’s ability and willingness to supply a product.
Equilibrium price?
The price at which the demand and supply curves cross is known as the equilibrium price.
At this price demand is equal to supply.
The equilibrium price will only ever change if there is a change in demand or supply which causes either of the curves to shift.
PED and YED
We know that price and income have an impact on the quantity demanded of a given good or service we measure how much changes in price or income alter demand for a good or service by calculating the elasticity of demand.
Price elasticity of demand (PED) measures the responsiveness of a change in demand for a good or service that results from a change in price of the good. Understanding price elasticity of demand is very important to business managers who need to know the impact of changes in price on likely levels of demand. They need to know how sensitive the demand for their good or service is to a change in price.
Price Elasticity of Demand
Price Inelastic: A change in price will lead to a less than proportional change in quantity demanded. Therefore demand is not sensitive to price changes. In other words if the price of a product increases the majority of people will continue to buy the product at the increased price.
Inelastic price elasticity of demand is likely to occur when the levels of competition are low, when there are a few substitutes, the goods are necessities or perhaps addictive. In these circumstances the business involved has much more control over the price than companies in highly competitive markets.
Examples - Necessities, such as water, power, basic foods. Addictive goods, such as cigarettes.
Price Elastic: A change in price will lead to a more than proportionate change in quantity demanded. Therefore demand for the product is very sensitive to a change in price. In other words if the price of a product increases consumers will switch to a cheaper alternative.
Given the conditions of near perfect competition, where goods are largely undifferentiated, this impact of the change in price on demand levels is quite predictable. Why should people buy a higher priced good when a virtually identical good is immediately available at a lower price?
Examples - Goods that have lots of alternatives (substitutes), e.g. washing powder, cornflakes, (other cereals), cinema
Of course for many retailers and producers price elasticity of demand is likely to be somewhere between highly elastic/sensitive and highly inelastic/insensitive. Knowing and understanding price elasticity of demand is important in decision-making, especially with regards to the marketing of goods.
The objective of most businesses would be to make the price elasticity of demand of their goods or services more inelastic. This means that they have more control over their price, they are price makers and not price takers. If price elasticity of demand is inelastic and increasing price causes a less than proportional fall in the quantity demanded, this means revenue would increase. This is a much more preferable situation to a situation where price elasticity of demand is elastic and there is an increase in price which leads to a more than proportional fall in the quantity demanded, resulting in a fall in revenue.
Businesses can make demand for their goods more price inelastic if they do the following:
• encourage consumer loyalty;
• reduce or restrict competition in the market;
• Increase brand value.
Income Elasticity of Demand
Income elasticity of demand measures the change in demand for a good or service that has been caused by a change in people’s income. Just like with price there are 3 levels of elasticity with regards to income. Business managers like to look at the relationship between changing (increasing or falling) incomes and changing demand levels for different types of goods or services. Generally real incomes increase over time (‘real’ means allowing for the impact of inflation), leading to increased wealth and rising demand for most, but not all, goods and services. As people get richer they consume more, driving up demand for many goods and services.
When we link this pattern of changing demand to changing income we can measure the income elasticity of demand for each type of good or service.
- Income elasticity of demand can be elastic: a change in income causes a more than proportional change in the quantity demanded. For example, a 5% increase in incomes leads to a 10% increase in demand for pizzas.
- Income elasticity of demand can be inelastic: a change in income causes a less than proportional change in the quantity demanded. For example, incomes fall by 4% but demand for toothpaste falls by just 2%.
- Income elasticity of demand can also be negative when a rise in incomes causes a fall in demand. For example, incomes increase by 6%, and this causes a 5% fall in demand for supermarkets’ own brand lemonade.
The type of product a business sells will have an impact on how demand responds to a change in income.
Normal Goods - responds as we might expect. As people become better off they buy more of this type of product. The majority of everyday items fall into this category – for example, cars, furniture, washing machines etc.
Luxury Goods - also fall into the category of normal goods but tend to be more sensitive to changes in real income. If incomes increase, demand for gym membership booms; if incomes fall many people quickly cancel their gym memberships in an attempt to save money.
Inferior Goods - are those goods that have negative income elasticity of demand – demand rises when real incomes fall. Supermarket own-label products are a good example of inferior goods. During a recession, consumers may turn to such products in order to economise. However, as incomes rise, they do not buy more of the own-label products but may switch to buy higher priced branded products instead.
Competition
There are a variety of differing market structures which are separated by the levels of competition that exist within each market and the market conditions in which the businesses operate. Competition increases as the number of businesses in the market increases:
MONOPOLY > OLIGOPOLY > MONOPOLISTIC COMPETITION > PERFECT COMPETITION
Different markets face differing degrees of competition, for example the nature of competition in the car insurance market would be very different to that in the smartphone industry.
