T1.2 Market Flashcards
What is meant by the term ‘demand’?
Demand is the number of products customers are willing and able to buy at a given price
Define complementary good
A complementary good is a good that is consumed together with another good, such as cars and petrol
Define the term normal good
A normal good is one for which demand increases as consumer income rises
Define substitute good
A substitute good is a replacement good, such as a different brand of car
Define inferior good
An inferior good is one for which demand decreases as consumer income rises
Define supply
Supply is the number of goods, services businesses are willing to sell at a given price in a specific time period
What is meant by the term ‘indirect tax’?
An indirect tax is one that causes an increase in the cost of production, such as VAT
Define the term ‘subsidy’
A subsidy is a form of financial assistance given to a business by the government, and it reduces the costs of production
Define external shock
An external shock is an unexpected event that can change the quantity of good or service supplied
What is a market?
A market is any place that brings buyers and sellers together to trade at an agreed price
Define PED
PED is a measure of how responsive change in QD is to a change in price
Define YED
YED measures how responsive the change in quantity demanded is to a change in income
Define normal good
A normal good is one for which demand increases as consumer income rises
Non-price factors affecting demand
- Changes in fashion & tastes
- Price of goods: complements & substitutes
- Advertising & Branding
- Changes in income
- Changing demographics
- External shocks
- Seasonality
Non-price factors affecting supply
- New technology
- Changes in cost of production
- External shocks
- Government subsidies
- Indirect taxes
PED formula
% change in Qd/ % change in P
What is PED between 0 & 1?
Inelastic
Demand is more responsive to a change in price
What is PED more than 1?
Elastic
Demand is less responsive to a change in price
Factors affecting PED
- Availability of substitutes - PED will be more price inelastic (lower) for goods that have fewer substitutes
- Brand loyalty - The aim of advertising and marketing expenditure by a business is to shift the demand curve to the right and make the demand more price inelastic
- Proportion of income spent - The smaller the proportion of income we spend on a product the more price inelastic the demand will be
- Luxury or necessity - Necessities are required as part of consumers’ daily needs and are therefore more price inelastic in demand
- Luxuries are not essential and are therefore more price elastic in demand - Time - The longer the time period under consideration the more price elastic the demand for a good or service is likely to be (consumers have more time to search for substitutes)
The shorter the time period under consideration the more price inelastic the demand for a good or service is likely to be
E.g. If the price of petrol increases making driving more expensive, there is little that consumers can do in the short term. However, they may switch to alternatives such as public transport or bicycles in the long term
YED formula
YED = % change on Qd/ % change in income
What type of (YED) good is more than 1?
Luxury
What type of (YED) is between 0-1?
Necessity
What type of good (YED) is less than 0?
Inferior
