The market 1.2 Flashcards
What is demand?
Demand is the price consumers are willing and able to pay for a good at a given price level in a given period of time
Describe the relationship between price and quantity demanded on a graph
The price of a good is inversely proportional to the quantity demanded for a good. For example, If the price for a good increased, the demand will decrease because people will substitute that good for a cheaper alternative.
Some of the causes of a change in demand?
Change in the level of disposable income Change in the general price level Seasonal changes External factors such as shocks Advertising and branding Changes in consumer trends
What is the income effect?
If price level increased, given that a persons income remains the same, people will be able to afford less or if prices decreases, this’ll give consumers more purchasing power so they buy more
What is the substitution effect?
If their is a increase in the price of good X then people are less likely to buy it. This will then lead to people finding cheaper alternatives and so they are more likely to buy more of good Y. This will decrease sales of good X and increase sales of good Y
What is a derived good?
This is demand for a factor of production used in the process of producing another good or service.
What is composite demand?
Where a good has more than one use. Increase in demand for one good leads to a fall in supply of the other e.g. Milk can be used to make: yoghurt, cheese, chocolate etc.
What is supply?
Supply is the amount that producers are willing or able to sell at a given price
How does cost of production influence supply?
If the cost of production was to decrease, supply shifts right because firms supply more as its more profitable. Vice versa
How does introduction of new technology influence supply?
Changing technology from old tech to new tech is more efficient meaning cost of production may decrease and therefore supply curve shifts right
How does a change in indirect taxes impact supply?
An increase in indirect taxes will increase cost of production therefore decreasing supply and shifting supply curve to the left
How does government subsidies impact supply?
A government may give subsidies or grants to help fund for projects or in this case, increase the supply of a good/service. This will decrease cost of production and increase supply shifting supply right
How do external shocks impact supply?
World event: 2008 financial crisis leading to credit crunch and businesses unable to invest or trade for future
Weather: bad weather, decrease production of good
Government: Govt regulations impact supply such as increase interest rates.
What is PED?
How responsive demand is to a change in price
The calculation of PED
% change in QD/ % change in price
Interpretation of numerical values of PED
Greater than 1 - elastic
In between 1 and 0 - inelastic
4 factors influencing PED
Time - short run is price inelastic, long run is price elastic
Substitutes - if more then elastic, if less then inelastic
Necessity - If necessity it is inelastic
Brand strength - more brand loyalty makes it more inelastic
What happens to revenues if PED is elastic?
Fall in price increases demand so revenues increase
Rise in price decreases demand so revenues decrease
What happens to revenues if PED is inelastic?
Fall in price decreases demand so revenues decrease
Rise in price increases demand so revenues increase
What is meant by Income elasticity of demand?
How responsive demand is to a change in income
Calculation of YED
% change in QD / % change in income
What are the 2 types of Normal goods and what is there YED
Necessity - YED between 0 and 1 (inelastic)
Luxury - YED more than 1 (elastic)
What is an inferior good? Possible reason for change.
When income rises, demand for that good falls. This is because may choose to spend more money for better goods and services as they can no afford to
