Demand Flashcards
Define DEMAND
Demand/effective demand is the amount of a good that consumers are willing and able to buy at a set price at any given time.
What are the factors affecting demand?
- Prices
- Social trends
- Advertising
- Season
- Demographics
- Availability
- Consumer incomes
- Competitors
- External shocks
Define SUBSTITUTES
Substitutes are goods that can be bought as an alternative to a good as they perform the same function.
Define a COMPLEMENTARY GOOD
Complementary goods are goods that are bought together because they are consumed together.
Define PRICE ELASTICITY OF DEMAND
Price elasticity measures the responsiveness of demand following a change in price.
Define a PRICE ELASTIC good
A price elastic good is one that experiences a more than proportional change in demand following a price change.
Define a PRICE INELASTIC good
A price inelastic good is one that experiences a less than proportional change in demand following a price change.
What is the PED formula?
PED = % change in demand/ % change in price
Define UNITARY ELASTICITY
Unitary elasticity is when the percentage change in demand equals the percentage change in price. The PED would be -1.
How can an elastic or inelastic product be identified by its PED?
If the PED is between 1 and infinity, the product is price elastic. If the PED is a decimal, the product is price inelastic.
PEDs will always be negative.
What does a steep demand curve imply?
A product that is price inelastic.
What does a shallow demand curve imply?
A product that is price elastic.
What are the factors that influence PED?
- Is the product a luxury or necessity?
- Possible close substitutes?
- Strength of brand loyalty?
- The starting price of the product
- The time period considered - the product may become less price elastic over time.
What are the advantages of PED data?
- Predicts the impact of a change in demand on a change in revenue. Asks if a price change is a good idea.
- Predicts the change in demand following a price change.
What are the disadvantages of PED data?
- Predictions are often based on past data which may be out of date and a inaccurate prediction of the future: competitor behaviour may have changed, consumer tastes and preferences may have changed.
- PED changes over different price ranges.
Define INCOME ELASTICITY OF DEMAND
Income elasticity of demand measures the responsiveness of demand following a change in consumer income.
What is the formula for YED?
YED = % change in demand/ %change in income
Define a NORMAL GOOD
A normal good is a good for which an increase in income leads to an increase in demand.
Define an INFERIOR GOOD
An inferior good is a good for which an increase in income leads to a decrease in demand.
What factors influence the YED?
- Is the good normal or inferior?
- Is the good a necessity or a luxury?
- What is the price of the product?
How can businesses use YED data?
- Allows them to predict the change in demand forecast if the economy changes.
- Helps to manage the business’ brand and plan the product portfolio.
Define SOCIAL TRENDS
Social trends are changes to the characteristics and attitudes of society over time.
Define EXTERNAL SHOCKS
External shocks are unexpected events that are outside the business’ control but have a direct impact on the level of demand or their ability to supply.
Define MARKET CLEARING PRICE
The market clearing price is the price at which demand is equal to supply.
