Supply and demand Flashcards
What is demand?
The amount of a good that consumers are willing and able to buy at a given price
What factors can influence demand?
-Income
-Population
-Seasonality
What is the economic theory?
Price will impact the demand of a product, e.g higher prices will lower the demand
What is a normal good?
An everyday good
What is an inferior good?
A cheaper alternative, demand will fall as income rises
What are luxury goods?
An expensive good, not an everyday good, demand will increase by a large amount if income rises
What are substitute goods?
An alternative good if the normal good isn’t available
What are complimentary goods?
A good complimenting another good, purchases are linked so if demand changes it will effect both
What are consumer tastes?
Changing consumer tastes will impact demand, must be aware of changing tastes and seasonality
What is supply?
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
Why does the supply curve slope upwards?
-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
What does outward shift mean?
A fall in production costs
What does inward shift mean?
Quantities are made more expensive to produce
Factors which may shift the supply curve:
-Change in technology
-Number of sellers
-Government taxes
What is market equilibrium?
Point where the demand and supply line cross, it is the price charged to customers
Explaining demand:
Buyers have a higher demand if there is a lower price but sellers have a higher demand at a higher price
Explaining supply:
Amount of stock a business makes and sells, higher price means a higher supply and a lower price means a lower supply
What is a customer?
Someone buying the product
What is a consumer?
Someone using the product
What is price elasticity of demand?
Measures how responsive demand is to changes in price
What is the formula for PED?
% change in quantity / % change in price
What is elastic demand?
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
What are the characteristics of elastic demand?
-Many substitutes
-Luxury products
-Large income
-Customers have a long time to decide
What is inelastic demand?
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
What are the characteristics of inelastic demand?
-Fewer substitutes
-Necessities
-Smaller income
-People require the product now
With inelastic demand when is revenue higher?
When price increases total revenue increases because consumers will continue to buy the product
With elastic demand when is revenue higher?
When price falls the total revenue increases
Why do businesses use elasticity?
-Helps them to determine price
-Helps them to see the impact price will have on demand
How does brand loyalty affect elasticity?
People will pay the higher price if they’re loyal to the brand, an inelastic demand
How does product differentiation affect elasticity?
Will become inelastic as they stand out from other businesses, people will pay a higher price if they can’t get it elsewhere
What is income elasticity? (YED)
Measures the relationship between a change in quantity demanded and a change in real income
What is the YED calculation?
% change in demand / % change in income
What is negative elasticity?
Higher income = fall in sales
-an inferior good
What is positive elasticity?
Higher income = more sales
-a normal good
What significance does income elasticity have on businesses?
-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
Factors influencing income elasticity?
-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
