EI - Demand and Supply and Market Forces (External Influences) Flashcards
Define Demand.
The amount of a good / service that customers are willing and able to buy at any given price
Define Supply.
The amount of the good / service that sellers are willing and able to sell at any given price
What is a Market?
Any situation where buyers and sellers are in contact in order to establish a price
On a Demand and Supply diagram what is on the y axis?
Price
On a Supply and Demand graph what is on the x axis?
Quantity Demanded
In Equilibrium Demand is […….] to Supply
Equal
In equilibrium there is no […….] stock
Unsold
If demand is high what will firms do?
- Firms will decide to increase prices of the product
- Companies also want to maximise profit so they will increase supply
What happens if there is excess supply in a market?
The price of the goods will decrease in order to increase demand and reach equilibrium
How does price affect the demand curve?
Price causes movements along the Demand curve not shifts
Define equilibrium?
The situation in a market when demand is equal to supply
What are the factors that effect demand?
- Price
- Income
- Wealth
- Advertising
- Tastes and Fashion
- Demographics
- Government Intervention
- Price or other goods
Factors that affect demand - how does price influence demand?
- Higher the price the lower the Quantity Demanded, vice Versa
- Remember it’s a movement along the Demand curve not a shift!!
Factors that affect demand - How does Income influence demand?
- Increase in income leads to an increase in demand for most goods (normal goods)
- However some goods such as inferior goods, their demand goes down as income rises
Factors that affect demand - How does Wealth influence demand?
- Wealth is not the same as income
- When an asset you own rises in value you feel richer even though your income has not increased.
- They feel more confident about spending more
Factors that affect demand - How does Advertising influence demand?
- Puts The product into the public eye, in order to become more well known
- Successful promotion campaigns shifts the demand curve to the right.
Factors that affect demand - How does Tastes and Fashion influence demand?
- Brand is seen more valuable than the actual product
- Consumers regard these products as essential for their lifestyle
- More people desire the product so the demand curve shifts to the right
Factors that affect demand - How doe Demographics influence Demand?
- Larger population means more spending
- Shifts in the age structure of the population, business need to be aware of because young people buy different things to older people
- A change in the gender ratio business need to be aware of because men buy different products to women
Factors that affect demand - How does Government action influence Demand?
- Campaigns ran by the government - eg. Live a healthier lifestyle
- These campaigns alter patterns of consumption
- This would make the Demand curve for firms selling healthier goods shift to the right
Factors that affect demand - How does the price of other goods influence demand?
• Substitutes
- Can be used instead of another because it performs the same sort of function
- In order to work have to be close substitutes, could be long term or short term price change
- An Increase In price of good A reduced the demand for Good A, Good B is a substitute of Good A meaning that Good A’s price rise causes the demand for Good B to increase
• Compliments
- Are products that are joint in demand, when one is bought so is the other
- If there is an increase in demand for DVD’s there will also be an increase in demand for DVD Players because DVD Players are a compliment of DVD’s
- Fall In the price of DVD Players moves consumers along the existing demand curve, moves along the curve
- Therefore for DVD’s the Demand curve shifts!
-
Define a Compliment.
A product that is used, and is therefore bought in conjunction with another
Define a Substitute.
An alternative product that serves the same function.
Factors that influence Supply.
- Price
- Costs
- Tax
- Subsidies
- Price of Other Goods
What is meant by Price?
The amount that a customer is willing and able to pay
Factors that influence supply - Price.
- When prices are low business supply less because it is less profitable to do so
- When prices are high business supply more
- Opposite to the demand and price relationship
Who do costs affect?
Costs affect the business not the consumer
Factors that influence supply - Costs
- Fall In Costs will cause Supply to rise
- When Costs go up supply will go down
- If the rate of interest goes down firms costs of borrowing will fall so it will have more money available, it can supply more.
- Positive changes send the supply curve to the right
- Negative Changes shift the curve to the left
Factors that influence supply - Tax
- Government puts a tax on product in order to raise revenue or to discourage the use of a product as it may be harmful (indirect tax)
- Tax increases costs and shifts supply curve to the left
When do we know if a consumer has been charged an indirect tax?
When the tax is only paid if a consumer actually buys the product
Factors that influence supply - Subsidy.
- Government does this to encourage the supply of certain products, because it believes they are beneficial.
- Has the opposite affect of tax
What is a Subsidy?
A payment from the government to encourage a business to increase supply
Factors that influence supply - Price of other products.
- Can be known as competitive supply
- Fall In the price of one good makes business stop supplying that good and move to another good which is more profitable
A rise in disposable income will shift the demand curve to the [……..]
Right
What is Price Elasticity of Demand?
Shows how responsive Demand is to a change in price
What is meant by elasticity?
Where the change in demand that results from a price change is greater than the change in price that caused it.
What is meant by Inelastic?
Where the change in demand ray results from a price change is less than the change in price that caused it.
Demand and Supply curves that are sloping 45 degrees are quite Elastic/Inelastic?
Elastic
If the supply or demand curve is quite steep does this mean the curve is Elastic or Inelastic?
Inelastic
[………] Demand curve are said to be elastic
Flatter
If demand for a product is price inelastic it means that…
When price rises the quantity demanded falls but not by a proportional amount.
What can a business do if demand for their products is price inelastic?
Can put the price of its products up, because there will no be a large fall in demand.
What makes a product demand Inelastic?
If a business has few substitutes for its product because consumers cannot switch to another product
What makes a product elastic?
Where there are many alternatives because consumer are able to switch to a substitute if prices rise.
If there is a shortage what will producers do?
Suppliers will edge the price up to meet equilibrium.
For a substitute good what will an Increase of Price for Good A have on demand for Good B?
Will cause demand for Good B to increase and demand for Good A to decrease
What makes demand elastic or inelastic?
- If a Business has few substitutes for its products then the price of the product rises, demand is inelastic as consumers cannot switch to another product
- Where there are many alternatives, demand will be elastic as consumers will be able to switch to a substitute if prices rise.
- Cost of buying the product in proportion to consumers income
