markets - questions

Question 1

how do you understand a market - how buysers behave in a marektplace

Answer 1

draw a demand curve

Question 2

how do you draw a deman curve

Answer 2

Choose a market. Always put price on the vertical. Always put the quantity demanded by consumers on the horizontal.

Question 3

what happens as the price of goods rise

Answer 3

Demand contrats (gets lower)

Question 4

what happenes when price of goods fall

Answer 4

demand extents (gets higher)

Question 5

what are the 2 types of demand shift

Answer 5

demand increases
demand decreases

Question 6

what causes a demand shift

Answer 6

a change in a ‘non-price’ factor

Question 7

what happends on a demand curve if the demand increasess

Answer 7

the curve shifts to the right as the is now more demand at every price level

Question 8

what happens on a demand curve if the demand decreases

Answer 8

it shifts to the left as demand has decreased at every price level.

Question 9

what 8 factors cause a demand curve to shift

Answer 9

demographics
external shocks
seasonality
income
price of other goods:
substitue goods
complimetary goods
fashions, tastes and preferences
advertised

Question 10

what would happen to a demand curve for toys if the UK birth rate fell (demographics)

Answer 10

the quantiy of toys demanded will decreaces and shift left.

Question 11

what would happen to a demand curve for furniture if the uk had a sudden recession (external shock)

Answer 11

households had less money and therefore spent less money in UK business. This would cause the demand for goods such as furniture to decrease and shift left

Question 12

what woudl happen to the demand curve for icecream as the season changes from winter to summer and vice versa (seasonality)

Answer 12

Summer to winter
In the summer, people demand more ice-cream and the demand curve shifts to the right.

winter to summer
In the winter, people demand less ice-cream and the demand curve shifts to the left.

Question 13

what would happen to the demand curve for foreign holidays if household income increases (income) and vice versa

Answer 13

Increase
increase in household’s income will lead to an increase in demand for most goods.

decrease
A fall in household income will lead to less demand for most goods.

Question 14

what would happen to the demand curves of tea and coffie if tea (coffies subsitiur’s) price raise and vice versaif tea falls. (subsitutes

Answer 14

Tea rises
tea’s demand will contract and coffies will shift right

tea falls
tea’s demand will extend and coffies will shift left.

Question 15

what woudl happen to the demand curves of tennis rackets and balls if the price lowers for rakcets (complimentary)

Answer 15

demand for rackets extend and demand for balls shift right

Question 16

what would happen to the demand curve of a coat if it became more and less fassionable (fashions, tastes and prefernces)

Answer 16

more fassionable
it would shift right

less fassionable
shift left

Question 17

what would happen to the demand curve for carsz if they were advertised more and less heavily (advertismed)

Answer 17

more heavily
shifts right

less heavily
shifts left

Question 18

why are firms more willing to supply goods at a higher price

Answer 18

it is more profitable

Question 19

what happens to supply if the price of a good rises

Answer 19

supply extends. moreve up and along (oposite to demand)

Question 20

what happens to supply if the price falls

Answer 20

supply contracts. move back and down. it is less profitable so firms are less willing to supply.

Question 21

what happens to the supply curve when supply increases

Answer 21

shifts right. More is now supplied at each and every price level. This is the same as the demand curve

Question 22

what happens to a supply curve when supply decreases

Answer 22

shifts left. less is supplied at each and every price level. This is the same as the demand curve

Question 23

what are the 5 factors that cause a supply curve to shift

Answer 23

changes to costs of production
indirect taxes
subsidies
introduciton of new tech
external shocks

Question 24

what are the 5 factors that cause a supply curve to shift

Answer 24

changes to costs of production
indirect taxes
subsidies
introduciton of new tech
external shocks

Question 25

where on a demand and supply model is market equlibirum achieved and what does this mean?

Answer 25

where demand and supply meet.

Equilibrium is a stable position in a market where there is no incentive for anything to change. (This is because demand equals supply at market equilibrium). This means that what consumers want to buy is the same as what firms wish to sell. There is just enough of the product available to match the demand at that price when at equilibrium.

Question 26

where on a demand and supply model is disequlibrum and what does it mean?

Answer 26

when firms want to supply more then demanded

there is more supplied than demanded. So firms would typically reduce the selling price to clear the excess stock of cars. As the price falls, the market will return to equilibrium.

Question 27

where on a demand and suply diagram is excess demand and what does this mean

Answer 27

More is demanded then supplied.

demand is greater than supply at. When firms face excess demand, they are forced to raise prices. As the price rises, the market returns to equilibrium

Question 28

what happens to a demand and supply diagram when demand increases?

Answer 28

demand curve would shift to the right. The new equilibrium price is higher than the original equilibrium price. The new equilibrium quantity is higher than the original equilibrium quantity.

Question 29

what happens to a demand and supply diagram when supp;ly increases

Answer 29

the supply curve will shift to the right. The new equilibrium price is lower than the original equilibrium price. The new quantity is higher than the original quantity.

Question 30

what happpens to a demand and supply diagram when demand decreases

Answer 30

the demand curve shifts left and the new equilibrium price is lower than the original equilibrium price. The quantity demanded and supplied of housing is lower than the original quantity.

Question 31

what happpens to a demand and supply diagram when supply decreases

Answer 31

the supply curve shifts left and The new equilibrium price is higher than the original equilibrium price. The new equilibrium quantity is now lower than the original equilibrium quantity.

Question 32

how is the result of a PED calculation expressed

Answer 32

All PED results have a ‘minus’ (-) sign attached. E,g, -2.4

Question 33

How do you tell if PED is inelastic from the number

Answer 33

it is less than 1. the closer to 0, the more inelastic. E.g. -0.03 (highly price inelastic) is not the same as -0.94 (price inelastic).

Question 34

how do you tell if PED is elastic

Answer 34

it is more than 1. The further it is from 1 the mroe elastic. E.g. -1.2 (price elastic) is not the same as -5.4 (highly price elastic).

Question 35

what are the 4 factors that affect PED and what are they

Answer 35

Number of close substitutes - the more close substitutes there are for a product, the more price elastic we would expect demand for a product to be.

Cost of switching between products - sometimes, consumers have to enter into a contract to purchase a good.

Luxury vs necessity - The more necessary a product is considered to be the more price inelastic we would expect demand for that product to be. Even if the price of the goods increases, consumers will still need to buy the ‘necessary item’. Hence demand for necessities tends to be price inelastic and the demand for luxuries price elastic.

Habit forming goods - The more habit forming a good is the more price inelastic we would expect the demand for the good to be. This is because, if a consumer is addicted to it, they will pay any price for the item. This produces a very steep demand curve.

Question 36

How is PED useful to a business if demand is price elastic (3 ways and explinations)

Answer 36

It could inform them to:
Cut costs of production but don’t raise the price - If a business faces a price elastic demand curve, raising the price of the good would not be advised. If the business raised the price, the quantity demanded would fall a lot. It would make more sense for the business to cut its costs of production in order to make more profit, as this wouldn’t affect the business’s sales.

Cut price - If a business that faces price elastic demand cuts the price of the good, there would be a greater than proportional extension in demand. This would increase the firm’s sales revenue.

Change the elasticity - how? - If a business faces a price elastic demand curve, it can try and make the demand curve more price inelastic. This is usually done by clever marketing that leads to a strong brand image being created.

Question 37

how does it halp a business if it knows its demand curve

Answer 37

it can establish a price that will enable it to maximise its total revenue.

Question 38

how are the reults from a YED calculation of a normal good represented

Answer 38

with a ‘+’ infront as If they are given more income, they will tend to buy more goods and services.

Question 39

how are the results of a YED calculation of an inferior good represented?

Answer 39

with a ‘-‘ infront
if a household is given more income, they will buy less of an inferior good.

Question 40

how do you know if PED is of unitary price leaaticity

Answer 40

result is 1 (-1), it means that demand is of unitary price elasticity. This means that any change in price will lead to an equal but opposite percentage change in QD.

Question 41

how do yuo know if YED is incelastic

Answer 41

it is less than 1

Question 42

how do yuo know if YED is elastic

Answer 42

it is more than 1

Question 43

how do yuo know if YED is of unitary income elasticity

Answer 43

it is1, it means that demand is of unitary income elasticity.
if income changed by 10%, QD would also change by 10%.

Question 44

what are the factors thatdetermin YED (2 and explinations)

Answer 44

Luxury VS necessity - i. If a good is a necessary, we would expect demand to be income inelastic. Whether a consumer’s income rises or falls, they’ll still buy bread and therefore the demand for bread is not sensitive to income change. Conversely, people can live without luxury items. Luxuries are typically income elastic. Similarly, if income rises, most households would adjust their spending towards more luxury items. Therefore, demand tends to be income elastic for luxury items.

Proportion of household income spent - If a good accounts for a small proportion of a typical family’s income, demand for that good will tend to be income inelastic. E.g. Netflix or a box of matches if income fell by 5% it is likely these would still be bought as they account for a small proportion of the income. A luxury sports car is typically a large proportion of a family’s monthly income. If income fell, most families would defer the purchase of the luxury item.

Question 45

from the YED how do you determin wether it is a luxuary or necessity?

Answer 45

If it is a luxuary it is more than 1 if it is a necessity it is less than 1

Question 46

how does knowing YED benefit a business (3 and explination)

Answer 46

Sales forecasting - If a business knows the expected change in GDP (i.e. the country’s national income) and its own YED, a business can calculate the expected change in its sales. A business can then use that information to inform its staffing decisions or its stock decisions ect…

How to focus NPD (New Product Development) - If a business currently produces only income elastic products, it knows that when national income is growing, its sales will increase greater than proportionally. Similarly, when GDP falls, sales will fall greater than proportionally. This means that in times of rising income, a lot of cash from sales is coming into the business, and when national income is falling, there will be a big fall in cash coming into the business. In order to ensure that cash comes in, irrespective of what is happening to national income, the business may want to develop an income inelastic product range.

Finance management in a downturn? (put away cash?) - If a business only sells income elastic products, it means that the business does really well when the economy is growing (i.e. national income is rising) but does terribly when national income is falling as sales will fall greater than proportionally to the decline in national income. If the YED is highly elastic, it would be wise to put away some cash in the ‘good times’ i.e. when the economy is growing, to compensate for the bad times i.e. when national income is falling. In this way, the business should always have sufficient cash available to run the business, irrespective of whatever happens to national income.