elasticity/ market analysis

Question 1

How do you calculate price elasticity?

Answer 1

= %change in Quantity demanded multiplied by % change in price

Question 2

What are some factors that determine price elasticity of demand?

Answer 2

• Number of close substitutes for a good and the uniqueness of the product in the market
• degree of necessity of consumption
• peak and off peak demand
• % of a consumers income allocated to consumers spending on the good

Question 3

What is the importance of price elasticity of demand for a business?

Answer 3

firms can use price elasticity of demand to predict:

• The effect of a change in price on quantity demanded
• The effect of a change in price on total revenue
• the likely price volatility in a market following unexpected changes in supply

Question 4

What is income elasticity of demand (yed)?

Answer 4

• income elasticity of demand (yed) measures the relationship between a change in quantity demanded and a change in real income.
• YED = % change in demand / % change in income

Question 5

What are Normal Goods?

Answer 5

• Normal goods have a positive and high income elasticity of demand so as consumers income rises, more is demanded at each level price.
• This means an increase in income causes an increase in demand. It has a positive YED. Note a normal good can be income elastic or income inelastic.

Question 6

What are necessity goods?

Answer 6

• necessities have a low but positive income elasticity of demand of between 0 and +1

Question 7

What are luxury goods?

Answer 7

• Luxuries have an income elasticity of demand > +1 i.e the demand rises more than proportionate to a change in income.
• A luxury good means an increase in income causes a bigger % increase in demand. It means that the YED is greater than one. For example, high definition TV’s would be luxury. When income rises, people spend a higher % of their income on the luxury good. (Note: a luxury good is also a normal good, but a normal good isn’t necessarily a luxury good)

Question 8

What are inferior goods?

Answer 8

• have a negative income elasticity of demand. so demand falls as income rises.
• An inferior good means an increase in income causes a fall in demand. It has a negative YED. An example, of an inferior good is Tesco value bread. When your income rises you buy less Tesco value bread and more high quality, organic bread.

Question 9

What does high income elasticity mean?

Answer 9

• demand is sensitive to changes in real incomes.
• demand is therefore cyclical - in an economic expansion, demand will grow strongly. in a recession demand may fall
• can be difficult for businesses to accurately forecast demand and make capital investment decisions.

Question 10

What is the significance of low income elasticity?

Answer 10

• demand is more stable during the fluctuations in the economic cycle
• over time, the share of consumer spending on inferior goods and normal necessities tends to decline.
• long run- businesses need to invest in/ products with a higher income elasticity of demand if they want to increase total profits.

Question 11

What is market analysis?

Answer 11

• market analysis is concerned with collecting and interpreting data about customers and the market so that businesses adopt a relevant marketing strategy.
• market research is carried out in order so that they can identify, anticipate and fulfil the needs and wants of the customers.
• data can come in the form of two types; qualitative and quantitative. Quantitative is based on numerical information and can be statistically analysed. qualitative data on the other hand, is information about decisions based on emotions, feelings and motivations.

Question 12

What kind of information does quantitative information gather?

Answer 12

• does a market exist, what is the size for the products/services.
• what are the demographics of the target market.
• what segments exist within the target market
• are segments large enough to be worthwhile

Question 13

what kinds of questions does qualitative data show businesses?

Answer 13

• what are customers motivations when purchasing a product
• what are customers’ views on competitor products
• what was the impact on viewers feelings in response to a visual marketing campaign?
• how attitudes of existing and potential customers changed in response to a marketing strategy.