Market Flashcards
what is demand
the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period
what’s effective demand
when a desire to buy a product is backed up by an ability to pay
what’s the law of demand
-there’s an inverse relationship between price of a hood and demand
-as price falls we see and expansion of demand
-as price rises we will see a contraction of demand
what’s the ceteris paribus assumption
many factors affect demand, when drawing a demand curve, economists assume all factors are held constant except one- price of product itself
what does the demand curve show
the relationship between price of item and quantity demanded over a period of time
what are the two reasons prices fall
1.the income effect- when the price of an item falls because the consumer can maintain the same consumption for less expenditure resulting in an increase in income
2.the substitution effect- when the price of a good falls because the product is now cheaper than an alternative item and some customers switch their spending from the alternative hood or service
changing prices if a complement
-two complements are in joint demand
-an increase in price of one product would cause a fall of quantity in the other
how does income of consumers effect the demand curve
-most things we buy are normal goods, when income increases our ability to purchase goods and services increase
-causes an outward shift in demand curve
-when income falls there will be a decrease in demand except for inferior goods
what are the effects of advertising and marketing
-heavy spending on advertising and marketing can help bring changes in consumer tastes and fashions
-increase in advertising= outward curve in demand
what’s market demand
-the sum of the individual demand for a product from each consumer in the market
-if more people enter the market and they have the ability to pay for items on sale, then demand on each price level will rise
what is supply
the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time
what is the basic law of supply
as the price of a product rises, businesses expand supply to the market
what are the causes of changes in supply
-cost of production
-external shocks
-new technology
-taxation and subsidies
what does a lower unit cost mean
means business can supply more at each price
what does a higher unit cost cause
cause an inward shift of supply
what are subsidies
-any form of government support offered to producers and occasionally consumers
what are the factors that cause demand curve to shift
PASIFIC
P-population
A-advertising
S-substitutes
I-income
F-fashion and trends
I-interest rates
C-complements
what are the factors that cause supply curve to shift
PINTS-WC
P-productivity
I-indirect taxes
N-number of new entrants
T-technology
S-subsidies
W-weather
C-costs of production
what is equalibrium
a state of equality or a state of balance between market demand and supply
what is disequilibrium
prices where demand and supply are out of balance
what will change the equilibrium price and quantity in the market
changes in conditions of demand and supply
what is elasticity in business?
The responsiveness of the quantity demanded to change in price
what is the equation for price elasticity of demand?
PED=% change in quantity demanded➗% change in price
how do you know if the relationship is elastic?
If the answer is between minus one, and infinity the relationship is elastic where percentage change in demand is greater than percentage change in price
How do you know if relationship is in elastic?
if answers between zero, and minus one, the relationship is in elastic where percentage change in demand is less than percentage change in price
What is price elasticity of demand?
Measure the extent to which the quantity of a product demanded is affected by change in price
What is unitary price elasticity
when the value of PED is exactly one and change in demand= change in price
why does elasticity of demand matter?
-If PED>1 (elastic) The change in price will cause a larger change in demand.
-Which causes the overall revenue to increase with a price, cut and overall revenue at full with a price increase
-Opposite in the case of PED<1 (inelastic)
what are five factors influencing PED
- brand strength(products with strong brand loyalty and reputation tend to be priced in elastic)
- Necessity(the more necessary product, the more demand tends to be inelastic)
- Habit. (tend to be price in elastic)
- Availability of substitute(demand for products that have lots of alternatives tend to be price elastic)
- Time(in the short short run price. Changes tend to have less impact on demand than over long periods.)
Income elasticity of demand equation
IED = % change in quantity demanded➗% change in income
what is income elasticity of demand?
It measures the extent to which the quantity of a product demanded is affected by change in income
What are characterised as a luxuries IED?
when income elasticity is more than one and as income grow proportionately, more is spent on luxuries like expensive holidays
what are characterised as necessities in IED?
When income elasticity is less than 1 and more than 0
-As income grows, proportionally less is spent on necessities like staple groceries
what happens to income and demand of inferior goods
As income rises, demand falls
What are limitations of IED?
-is difficult to get reliable data
-Other factors affected demand, like customer taste
-Many markets subject to rapid technological change, which makes previous data less reliable
-Competitors rule, react pricing decisions can’t be taken in isolation
