Markets Flashcards
Define competition
The number of firms that are operating in the same market, they are competing to sell similar products to the same target market
Define a market
A place where buyers and sellers come together to exchange goods or services, usually involving an exchange of money at a set price
Define competitive advantage
A feature of a business that allows it to perform more successfully than others in the market
State the strategies of competition
New product development, Changing or improving existing products, promotions, changing prices, improving distribution channels and improving customer service (training staff)
State the 5 types of markets
Local-Global, Mass-Niche, Trade-Consumer, Product-Service, Seasonal
Comment on product targeting, segmentation, appeal, availability and advertising in mass markets
Products are targeted at a wide range of people
The market is not segmented
Appeals to a wide range of customers
Widely available through a range of markets
Mass media used to advertise
Comment on gap filling, target market, promotion and price changes in niche markets
Identifies small and currently unsatisfied gaps
Target market is well defined with distinct characteristics
Promotion is targeted at a small subsection of the whole market
Often charge higher prices
Discuss the logistics of trade markets
Where businesses are selling to other businesses, the technical specification of the product and service is likely to be more important than the physical environment
Discuss the logistics of consumer markets
Where businesses sell to the public, the product and the price are of equal importance to the physical environment but more important than place (it doesn’t matter what channels the product went through to reach the consumer
What is market size
The total value or volume of sales in the market, number of units sold multiplied by selling price
What is market share
The proportion of total market share that a firm has, sales of one firm divided by total market sales multiplied by 100
What are market trends
The overall changed in the market, (growing, static or declining) which businesses are gaining or loosing market share
What is market segmentation
When the market is split into subgroups of consumers with similar characteristics
What are the 4 types of market segmentation
Demographic, geographic, income and behavioral
Describe demographic segmentation
Identifies subgroups of the population based on their demographic profile or characteristics, looking at the social and economic characteristics of individuals and households
What are the categories of demographic segmentation
Age, gender, level of education, race, religion, family size, stage in life
Define geographic segmentation
Defines market categories based on where people live, people from different places have different characteristics
What are the categories of geographic segmentation
Warmer and colder regions, taste and tradition, infrastructure
Define income segmentation
Identifying subgroups of the market based on their level of income and profession
Explain socio-economic groupings (income segmentation)
A - Higher managerial (chief executives and directors)
B - Intermediate managerial (accountants and doctors)
C1 - Supervisory, clerical or junior professional (teachers)
C2 - Skilled manual (Plumbers)
D - Semi and unskilled workers (window cleaners)
E - Pensioners, casual workers, students and unemployed
Define behavioral segmentation
Characterizes subgroups based on the behavioral patterns of the consumer rather than their characteristics
What are the characteristics of behavioral segmentation
Reasons for making purchases, frequency of purchase, time of purchase, brand loyalty, method of purchase and triggers
Explain the impact of market segmentation
Advertising can be targeted so spending on advertising is more effective, profitability of customers can be identified, avoid less profitable markets, easier to launch new products, greater variety of goods and services in the market
Define competitive environment
The degree of competition in the market and the buying and selling power of customers and suppliers within the market
Describe a monopoly
When one firm dominates the market
Describe an oligopoly
When a few firms dominate the market
Describe monopolistic competition
When there are many firms in the market but there is some form of product differentiation
What assumptions is the model of perfect competition based on
Large number of producers, identical products, freedom of entry and exit and readily available information
Describe producers in the context of perfect competition
Each firm is relatively small in size and sell to a large number of buyers, all producers are price takers and so cannot influence price, each firm can sell all of its output at the current market price therefor it would not lower its prices
Describe homogeneous products in the context of perfect competition
Buyers cannot tell the difference between products from different firms, there is no branding and brand loyalty does not exist, firms cannot raise their prices beyond competitors, in reality firms will sell unique products
Describe freedom of entry and exit in the context of perfect competition
Firms are free to enter or exit the market if they wish to do so, therefor entry costs are very low or even non existent, firms can move into the market if they see that profits are higher than usual, the opportunity to charge higher prices is restricted
Describe readily available information in the context of perfect competition
Perfect knowledge exists, all economic targets (buyers) have a comprehensive understanding of all the factors within a market, all buyers have all the info about prices and availability of goods and services in the market, all sellers know how to produce goods and services so produce the same quality of output
Define imperfect competition
A type of market structure that exhibits some but not all elements of perfect competition
What differences does imperfect competition have
Less firms in the market, some form of product differentiation, some barriers to entry and exit, demand curve is downward sloping, suppliers can influence prices
Define price leaders (monopoly)
They can charge high prices but these are often restricted by government regulation
Is new product development effected by competitors in a monopoly
No
How do monopolies inform and persuade customers
Promotion
How do monopolies increase sales revenue
Increasing the market size
How do the government define monopolies
Any company that has more than 25 percent market share
Why are monopolies regulated by the government
They can exploit customers by charging high prices
What barriers to entry exist in a monopoly
High capital costs, economies of scale, legal barriers (only pharmacies can sell prescription drugs)
What is a pure monopoly
One firm exists in the industry
What is a duopoly
There are only two firms in the market
What competitive strategy is prominent in a duopoly
Non - price competition like promotion
What is collusion
Mostly in duopolies where agreements are made to restrict competition, this is illegal
What is an oligopoly
Where there are only a few firms in a market
Why is it crucial for oligopolies to pay attention to competitors
If one firm lowers prices the rest will follow suit and the market as a whole will lose value
What are the characteristics of an oligopoly
Do not compete on price in the long term, do compete on price in the short term, spend heavily on new product development, branding is critical and large marketing budgets are common, firms must ensure that products are accessible to be successful
Where does monopolistic competition exist
Where there are a large number of firms in the market selling differentiated products, this leads to a small degree of monopolistic power as each firm offers something different to consumers
Describe barriers to entry in the context of monopolistic competition
Very low which creates very strong competition
Give a few examples of monopolistic competition
Hairdressing, restaurants and the health and beauty industry
When do barriers to entry exist
When firms that are within an industry are protected from competition from outside the industry, these obstacles may occur naturally or be man made through intervention
Give 3 barriers to entry
Advertising, economies of scale and financial
Define product differentiation
When firms make their product different to the competition by adapting the actual product in some way or distinguishing the product through advertising and branding
Define USP
Something that distinguishes a firms product from those of its competitors and can allow a firm to charge a premium price
State competition policy
A monopoly exists where there is only one firm in the market.
The government refer to any company that has at least 25 percent market share as having monopoly powers.
Market power is the ability of a firm to set prices above those that would be charged if there were competition.
Monopolies can exploit consumers by charging higher prices.
Therefor, monopolies are regulated in order to protect the customer.
The objective is to achieve free and fair competition.
Define demand
The amount society is willing to able to buy at a set price at a given point in time
Define a normal good
A good where if the prices rise, demand will fall and vice versa, there is a negative correlation
How is the relationship between price and quantity demanded determined
By constructing a demand curve
What is a demand curve
A graphical representation of the relationship between price and quantity demanded
What are the axis of a demand curve
Y is price and X is quantity
What are the factors leading to a change in demand
Change in price (movement along)
Change in other factors (shift)
What are the non price factors that change demand
Changes in price of substitutes and complimentary goods, changes in consumer income, fashion taste and preferences, advertising and branding, demographics, external shocks, seasonality
Why do substitute goods affect demand
It acts as an alternative and therefor creates competition, if the price of good A increases the demand of good B will increase, there is a positive correlation
Why do complimentary products affect demand
They are bought alongside a good or service, if the price of good A increases the demand for good B will decrease (negative correlation)
What happens to demand when consumer income increases
Demand increases
What effect does increased income have on the demand of necessities
It’s not really affected because they are essential and would be purchased regardless of income
What effect does income have on the demand for luxuries
If income increases customers may be able to afford more luxuries causing an increase in demand
What effect does income have on the demand for inferior goods
If income increases demand may decrease as customers switch to being able to afford a better quality product
Define advertising
A promotional method that involves the use of media to communicate with existing and potential consumers with a purpose of creating awareness and desire
Define branding
A promotional method that involves the creation of an identity for a business that distinguishes the firm and its products from competitors
Define the term demographic factors
The statistical characteristics of the population
Give examples of demographic factors
Age, gender and ethnic mix
What effect has migration had on demand
Increased the demand for a wide range of goods and services such as housing, public transport and healthcare
Define external shocks
Unexpected events that are outside of the businesses control but have a direct impact on the level of demand
Define seasonality
The fluctuation in demand depending on the time of year
Why does seasonality exist
Changes in the weather and public holidays
What causes a demand curve shift
If the change in demand is caused by any factor other than price, an increase in demand is shown by a shift to the right and a decrease to the left
Define supply
The amount of a good or service that producers are willing and able to sell at any given price
Define producers
Those that create and supply goods and services to a market
What happens to supply as price falls
Supply decreases
What happens to supply as prices rise
Supply rises because profit margins are greater
What are the axis on a supply curve
Y is price and X is quantity
What happens to supply output if the cost of production increases
Some firms will reduce output because it becomes less profitable
How have technological advances improved the cost of production
Large scale machinery allows fixe costs to be spread over greater output making the cost per unit cheaper, as tech improves firms find more profitability in supplying
What is taxation
A charge placed on individuals and firms, governments use this money to finance their spending
What are indirect taxes and the types
Taxes placed on goods and services produced by individuals or firms, VAT and duties
What happens to the supply of a product if indirect taxes increase
It becomes more expensive to produce so the quantity supplied will decrease
What are subsidies
Finance provided by the government to encourage suppliers to produce goods and services
Name 3 external shocks that affect supply
Natural disasters, terrorist attacks and outbreaks of disease
What causes a shift in the supply curve
Any factor other than price
What is market equilibrium
The point at which demand is equal to supply, also known as the market clearing price
Describe market clearing price
All buyers can get the exact amount that they want to buy at this price so there is no supply left over, any change in demand or supply will lead to a new market clearing price
Give some causes of shifts in the supply curve
The impact of changing costs of production, technological progress, prices of other goods and services and government policies
What does price elasticity of demand measure
How responsive demand is to a change in price
What does price elastic demand mean
A change in price will lead to a more than proportional change in demand
What does price inelastic demand mean
A change in price will lead to a less than proportional change in demand
State the PED formula
Percentage change in demand divided by percentage change in price
State the range of price inelastic demand
0 and -1
State the range of price elastic demand
-1 and -1.4
Explain how the availability of substitutes affects PED
The closer the substitutes and the more that are available, the higher the PED
Explain the effect of price of competitor goods on PED
If the price of goods in competition with a product increases the PED is effected
Explain the effect of time on PED
The longer the time period the higher the PED, Given more time other firms have the ability to produce similar products and customers have more chance of adapting their buying habits
How does branding affect PED
Firms spend time and money building brand image, they build brand loyalty and can then charge higher prices as the PED is lower
How does income affect PED
If consumers incomes are higher then the issue of price becomes less important to the customer and its easier for firms to raise prices as the PED is lower
How does the nature of a good affect PED
A luxury good will be price elastic as demand will be more sensitive to changes in price, a necessity good will be price inelastic as demand is less sensitive to changes in price
How does raising and lowering selling price affect price elastic demand products
Raising will decrease revenue, lowering will increase revenue
How does raising and lowering selling price affect price inelastic demand products
Raising will increase revenue, lowering will decrease revenue
What are some issues with forecasting PED
Constantly changes in a dynamic world, hard to measure because it changes over different price ranges, competitors do not stand still and tastes and fashion are always changing
What is income elasticity of demand
A measure of the responsiveness of demand to a change in income
What is the type of good that has a demand increase when income increases
Normal goods
Do normal goods have a positive or negative income elasticity of demand
Positive
What type of good has a decrease in demand when income increases
Inferior goods
Do inferior goods have a positive or negative income elasticity of demand
Negative
State the formula for income elasticity of demand
Percentage change in quantity demanded divided by percentage change in income
State the range of YED coefficient for income inelastic goods, what does this mean for a business
-1 to 1, demand changes at a lower proportion than the change in income
State the range of YED coefficient for income elastic goods, what does this mean for the business
Less than -1 or greater than 1, demand changes at a higher proportion than the change in income
What determines the income elasticity of demand for a product
Whether it is a luxury or necessity
