The market

Question 1

Demand

Answer 1

The amount of a product that consumers are able and willing to purchase at any given price

Question 2

Normal good
Inferior goods
What does a demand curve show?

Answer 2

One where if price rises demand falls- negative correlation
Good for which demand will fall if income rises
The quantity demanded for a good at any given price, over a period of time

Question 3

Factors leading to changes in demand:

Answer 3

1)Prices of substitutes
2) prices of compliments
3) changes in consumer income
4) fashion tastes and preferences
5)marketing advertising and branding
6)demographics
7) EXTERNAL SHOCKS: competition, government, social and environmental changes, economic climate(recession/growth)
8) seasonality

Question 4

Demand acronym

Answer 4

Demand = PASIFIC
Population
Advertising
Substitutes
Income (Disposable)
Fashion and Taste
Interest Rates
Complements

Question 5

Complementary goods

Substitute (goods)

Answer 5

Goods that are purchased together cause they r consumed together

Good that can be brought as an alternative to others but preform the same function

Question 6

Supply

Supply curve

Answer 6

The amount of product that suppliers will make available to the market at any given price through a period of time

A line drawing on a graph that shows how much of a pro cut suppliers are willing to supply at a different prices

Question 7

Main factor leading to change in supply

Answer 7

= price. Higher market price means suppliers are more willing to supply more as they can gain more profit at higher prices

Question 8

Other factors leading to change in supply

Subsidy definition

Answer 8

1) changes in costs of production
2)introduction of new tech
3) indirect tax
4) government subsidies
5) EXTERNAL SHOCKS: world events, government, weather, price of related goods

A grant given by government to producers usually to encourage production of a certain product

Question 9

Equilibrium price/ market cleaning price

Answer 9

Price at which supply and demand are equal

Question 10

What happens as result of disequilibrium prices?

Answer 10

1) price below equilibrium price= excess demand= shortage of goods in market
2) price above equilibrium price=excess supply =goods unsold

Question 11

Define:
Excess demand
Excess supply

Answer 11

The point at which demand exceeds supply a given price and there are shortages in the market

The pint at which supply exceeds demand at a given price and there unfold goods in the market

Question 12

Total revenue is same as

Answer 12

Total expidenture

Question 13

GRAPHS

if demand increases…

if supply increases…

Answer 13

price will rise, D1-D2

price will fall- S2-S1

Question 14

market forces

market forces are…

Answer 14

actions of buyers and sellers that cause prices of G&S to change without being controlled by government

…always pushing prices towards market equilibrium

Question 15

-1<0<1=

Answer 15

Inelastic

Question 16

Luxury good

Answer 16

A good for which demand increases more than proportionally as income rises
—> products that are not essential but highly desired and associated with wealthy affluent people

Answer 17

YED is used by business to help them decide what products and services they should offer in order to increase sales

Question 18

Price elasticity of demand

Price elastic demand

Price inelastic demand

Answer 18

The responsiveness of demand to a change in price
=percentage change in demand/ percentage change in price

A change in price results in a bigger change in demand

A change in price results in a proportionally smaller change in price

Question 19

Factors influencing PED

Answer 19

1) The availability of substitutes – the closer the substitutes and the more that are available the higher the price elasticity of demand

2)The price of competitor goods – if the price of goods in competition with a product increase this will affect demand and price elasticity of demand

3) Time – the longer the time period the higher the price elasticity of demand. Given more time other firms have the ability to produce similar products and customers have more chance of adapting their buying habits

4) Branding – firms spend time and money building up their brand image. By creating brand loyalty firms know that their customers will be willing to pay more for the product and they can therefore raise prices as the PED is lower

5) Income - if consumer incomes are higher then the issue of price becomes less important to the consumer and it is easier for firms to raise price as the PED is lower

6) Nature of the good
a luxury good will be price elastic as demand will be more sensitive to changes in price
a necessity good will be price inelastic as demand will be less sensitive to changes in price

Question 20

Income elasticity of demand

Inferior goods

Normal goods

Income elastic goods (vv for income in elastic)

Answer 20

The responsiveness of a change in demand to a change in income
=%change in demand/%change in income

Goods for which demand will fall if income rises (vice versa)

Goods for which demand will rise when income rises

The percentage Change in demand is proportionally greater than the percentage change in income

Question 21

Factors influencing income elasticity of demand

Answer 21

1) the price of a product relative to incomes-

2) nature of good
- necessities are income inelastic
- Luxury goods are income elastic

Question 22

Discretionary expenditure

Answer 22

Non essential spending or spending that is not automatic

Question 23

The significance of income of elasticity of demand

Answer 23

Wealthier countries are likely to have consumers with higher disposable incomes
——This means that they have greater spending power and are likely to use some of this greater income to buy luxury goods and services
—Therefore, firms will produce superior products that meet the needs of these consumers e.g. high technology goods and complex financial services

As global standards of living increase we would expect to see an increase in demand for luxury goods and a movement away from inferior goods
—Firms will identify the state of the economy e.g. recession and produce goods and services to meet the demand of consumers. For example, pound shops selling necessities and inferior goods are likely to expand in these market conditions

Question 24

Significance of income of elasticity of demand

Answer 24

Goods with high income elasticity -when economy is growing demand increases however when economy is in recession demand falls

Goods with low income elasticity
-production, planning and investments is easier
In countries with stable economic growth Demand for inferior goods and normal necessities decline

Production planning: businesses know income elasticity of demand = can respond to predicted changes in incomes.
Businesses that produce goods that have income elastic demand
will expect changes in income to affect demand. So if incomes are expected to rise in the future they can plan ahead, making sure they have enough capacity,
for example. Whereas, if a recession is expected, these
businesses would plan to cut output. This is because
incomes are likely to fall during a recession.
- When incomes fall, demand for inferior goods, such as those sold by low-cost supermarkets,
starts to rise.

Product switching: Some manufacturers have
flexible resources and can switch from the production
of one product to another.
-A predicted rise in incomes may encourage such a business to make more income elastic products