introducing the market

Question 1

Define:
Effective demand
Individual demand
Market demand

Answer 1

• Effective demand; the quantity that consumers are wiling to buy at the current market price
• Individual demand; the demand of an individual or firm
• Market demand; the sum of all individual demands in the market

Question 2

How do prices affect the demand/supply curve?

Answer 2

Prices cause movements along the demand and supply curves.

Prices do not cause shifts in the demand and supply curves.

Question 3

What affects demand?

Answer 3

Population
Income
Related Goods
Advertising
Tastes and Fashions
Expectations
Seasons

Question 4

What are the 3 different types of supply?

Answer 4

• Joint supply
• Composite supply
• Competitive supply

Question 5

Recall 3 reasons why the supply curve is upward sloping.

Answer 5

• If price increases, it’s more profitable for firms to supply the good
• High prices encourage new firms to enter the market
• Larger output increases costs, which are passed onto consumers in the form of higher prices

Question 6

What are the factors that affect supply?

Answer 6

Productivity
Indirect Taxes
Number of Firms
Technology
Subsidies
Weather
Costs of Production

Question 7

How will exchange rates affect level of supply?

Answer 7

A decrease in the exchange rate boosts the costs of imports (raw materials), which increase the cost of production for firms, thus shifting the supply curve to the left.

Question 8

Define the market equilibrium price.

Answer 8

This is the price where supply meets demand, and has no tendency to change.

Question 9

Describe a market in excess demand.

Answer 9

Price increases, firms supply more, consumers demand less and market returns to equilibrium.

Question 10

What are the cons of using the supply and demand model to explain real-world problems?

Answer 10

• They only show certain markets
• Assumes price increases means firms will supply more
• Assumes perfect information
• Assumes perfectly competitive markets

Question 11

What are the 3 different functions of the price mechanism?

Answer 11

• Rationing
• Incentive
• Signalling

Question 12

What is the difference between a mass market and niche market?

Answer 12

A mass market is the largest group of consumers for a product.

A niche market is a smaller market focused on a specific product.

Question 13

Why are niche markets generally better at allocating resources?

Answer 13

As niche markets target the consumers directly, rather than generally, they are closer to the consumer and therefore have a better idea of who needs what goods.

Question 14

Describe the difference between primary and secondary research.

Answer 14

Primary research is carried out directly, whereas secondary research is carried out via a third-party.

Question 15

Evaluate the use of primary research over secondary research.

Answer 15

Primary research is expensive but produces more specific findings than secondary research, which may not be as useful.

Question 16

Define market research.

Answer 16

The collection of data in order to learn about the needs and wants of consumers.

Question 17

What is a disadvantage to using samples to analyse the market?

Answer 17

The sample used may be biased, and therefore give invalid results.

Question 18

What is market segmentation?

Answer 18

This is when the market is divided into categories of consumers based on their characteristics, needs, etc.

Question 19

How could market segmentation benefit firms?

Answer 19

By categorising consumers based on their needs/wants, firms can better target their goods to fulfil these specific needs.

Question 20

How does a market map work?

Answer 20

It illustrates all the positions a product can take based upon two dimensions which are significant for consumers.

It then identifies which existing products meet which consumer needs, thus identifying gaps for new market participants to fill.

Question 21

Give examples of dimensions used in market mapping.

Answer 21

• High vs low price
• High vs low volumer
• Heavy vs light
• Good vs lesser quality

Question 22

When does a firm have a competitive advantage over other market participants?

Answer 22

This occurs when the firm in questions produces better products than its competitors in the same market.

Question 23

How can a firm gain a competitive advantage?

Answer 23

It can use price, quality, cost or a niche market to give itself a unique feature that makes it stand out from its competitors in the same market.

Question 24

What is product differentiation?

Answer 24

The act of distinguishing one product from another.

Question 25

How can value be added to products and services?

Answer 25

Value can be added to a product using a brand, quality, good service, unique features and convenience for the customer.

Question 26

How do firms in a perfectly competitive market determine the prices of their goods and services?

Answer 26

Firms must take the equilibrium price of the market, where supply = demand.
These types of firms are price-takers.

Question 27

Describe the difference between stable and dynamic markets.

Answer 27

A stable market rarely changes the prices of goods, whereas dynamic market prices are constantly changing.