Supply and demand

Question 1

What is demand?

Answer 1

The amount of a good that consumers are willing and able to buy at a given price

Question 2

What factors can influence demand?

Answer 2

-Income
-Population
-Seasonality

Question 3

What is the economic theory?

Answer 3

Price will impact the demand of a product, e.g higher prices will lower the demand

Question 4

What is a normal good?

Answer 4

An everyday good

Question 5

What is an inferior good?

Answer 5

A cheaper alternative, demand will fall as income rises

Question 6

What are luxury goods?

Answer 6

An expensive good, not an everyday good, demand will increase by a large amount if income rises

Question 7

What are substitute goods?

Answer 7

An alternative good if the normal good isn’t available

Question 8

What are complimentary goods?

Answer 8

A good complimenting another good, purchases are linked so if demand changes it will effect both

Question 9

What are consumer tastes?

Answer 9

Changing consumer tastes will impact demand, must be aware of changing tastes and seasonality

Question 10

What is supply?

Answer 10

The quantity of a good or service that a producer is willing to provide to the market place at different times, higher prices mean a larger quantity supplied

Question 11

Why does the supply curve slope upwards?

Answer 11

-Profit motive = the market place rises and becomes more profitable for businesses to increase their output
-Production and costs = when output expands, production costs rise and businesses up the price to cover the costs
-New entrants coming into the market = higher prices may encourage new businesses to enter the market which leads to an increase in supply

Question 12

What does outward shift mean?

Answer 12

A fall in production costs

Question 13

What does inward shift mean?

Answer 13

Quantities are made more expensive to produce

Question 14

Factors which may shift the supply curve:

Answer 14

-Change in technology
-Number of sellers
-Government taxes

Question 15

What is market equilibrium?

Answer 15

Point where the demand and supply line cross, it is the price charged to customers

Question 16

Explaining demand:

Answer 16

Buyers have a higher demand if there is a lower price but sellers have a higher demand at a higher price

Question 17

Explaining supply:

Answer 17

Amount of stock a business makes and sells, higher price means a higher supply and a lower price means a lower supply

Question 18

What is a customer?

Answer 18

Someone buying the product

Question 19

What is a consumer?

Answer 19

Someone using the product

Question 20

What is price elasticity of demand?

Answer 20

Measures how responsive demand is to changes in price

Question 21

What is the formula for PED?

Answer 21

% change in quantity / % change in price

Question 22

What is elastic demand?

Answer 22

When the % change in demand is higher than the % change in price, the amount people buy is sensitive to change
-They are goods people already want to buy

Question 23

What are the characteristics of elastic demand?

Answer 23

-Many substitutes
-Luxury products
-Large income
-Customers have a long time to decide

Question 24

What is inelastic demand?

Answer 24

When the % change in demand is less than the % change in price, people will continue to buy it even if the price increases e.g milk

Question 25

What are the characteristics of inelastic demand?

Answer 25

-Fewer substitutes -Necessities -Smaller income -People require the product now

Question 26

With inelastic demand when is revenue higher?

Answer 26

When price increases total revenue increases because consumers will continue to buy the product

Question 27

With elastic demand when is revenue higher?

Answer 27

When price falls the total revenue increases

Question 28

Why do businesses use elasticity?

Answer 28

-Helps them to determine price -Helps them to see the impact price will have on demand

Question 29

How does brand loyalty affect elasticity?

Answer 29

People will pay the higher price if they're loyal to the brand, an inelastic demand

Question 30

How does product differentiation affect elasticity?

Answer 30

Will become inelastic as they stand out from other businesses, people will pay a higher price if they can't get it elsewhere

Question 31

What is income elasticity? (YED)

Answer 31

Measures the relationship between a change in quantity demanded and a change in real income

Question 32

What is the YED calculation?

Answer 32

% change in demand / % change in income

Question 33

What is negative elasticity?

Answer 33

Higher income = fall in sales -an inferior good

Question 34

What is positive elasticity?

Answer 34

Higher income = more sales -a normal good

Question 35

What significance does income elasticity have on businesses?

Answer 35

-Retailers use it to plan sales and sell their own brand goods during a recession -Producing few inferior goods may protect a business from a recession -Consumer income rises, demand for normal goods increases

Question 36

Factors influencing income elasticity?

Answer 36

-Type of product, luxury or inferior (luxuries have a higher YED) -Consumer perceptions, businesses use promotional techniques to encourage customers to spend extra income on their goods -New products, USP will become income elastic