Demand

Question 1

Define DEMAND

Answer 1

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.

Question 2

What are the factors affecting demand?

Answer 2

• Prices
• Social trends
• Advertising
• Season
• Demographics
• Availability
• Consumer incomes
• Competitors
• External shocks

Question 3

Define SUBSTITUTES

Answer 3

Substitutes are goods that can be bought as an alternative to a good as they perform the same function.

Question 4

Define a COMPLEMENTARY GOOD

Answer 4

Complementary goods are goods that are bought together because they are consumed together.

Question 5

Define PRICE ELASTICITY OF DEMAND

Answer 5

Price elasticity measures the responsiveness of demand following a change in price.

Question 6

Define a PRICE ELASTIC good

Answer 6

A price elastic good is one that experiences a more than proportional change in demand following a price change.

Question 7

Define a PRICE INELASTIC good

Answer 7

A price inelastic good is one that experiences a less than proportional change in demand following a price change.

Question 8

What is the PED formula?

Answer 8

PED = % change in demand/ % change in price

Question 9

Define UNITARY ELASTICITY

Answer 9

Unitary elasticity is when the percentage change in demand equals the percentage change in price. The PED would be -1.

Question 10

How can an elastic or inelastic product be identified by its PED?

Answer 10

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.

Question 11

What does a steep demand curve imply?

Answer 11

A product that is price inelastic.

Question 12

What does a shallow demand curve imply?

Answer 12

A product that is price elastic.

Question 13

What are the factors that influence PED?

Answer 13

• 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.

Question 14

What are the advantages of PED data?

Answer 14

• 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.

Question 15

What are the disadvantages of PED data?

Answer 15

• Predictions are often based on past data which may be out of date and a inaccurate prediction of the future: competitor behaviour may have changed, consumer tastes and preferences may have changed.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.

Question 16

Define INCOME ELASTICITY OF DEMAND

Answer 16

Income elasticity of demand measures the responsiveness of demand following a change in consumer income.

Question 17

What is the formula for YED?

Answer 17

YED = % change in demand/ %change in income

Question 18

Define a NORMAL GOOD

Answer 18

A normal good is a good for which an increase in income leads to an increase in demand.

Question 19

Define an INFERIOR GOOD

Answer 19

An inferior good is a good for which an increase in income leads to a decrease in demand.

Question 20

What factors influence the YED?

Answer 20

• Is the good normal or inferior?
• Is the good a necessity or a luxury?
• What is the price of the product?

Question 21

How can businesses use YED data?

Answer 21

• Allows them to predict the change in demand forecast if the economy changes.
• Helps to manage the business’ brand and plan the product portfolio.

Question 22

Define SOCIAL TRENDS

Answer 22

Social trends are changes to the characteristics and attitudes of society over time.

Question 23

Define EXTERNAL SHOCKS

Answer 23

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.

Question 24

Define MARKET CLEARING PRICE

Answer 24

The market clearing price is the price at which demand is equal to supply.