The market Flashcards
Demand
The amount of a product that consumers are able and willing to purchase at any given price
Normal good
Inferior goods
What does a demand curve show?
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
Factors leading to changes in demand:
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
Demand acronym
Demand = PASIFIC
Population
Advertising
Substitutes
Income (Disposable)
Fashion and Taste
Interest Rates
Complements
Complementary goods
Substitute (goods)
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
Supply
Supply curve
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
Main factor leading to change in supply
= price. Higher market price means suppliers are more willing to supply more as they can gain more profit at higher prices
Other factors leading to change in supply
Subsidy definition
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
Equilibrium price/ market cleaning price
Price at which supply and demand are equal
What happens as result of disequilibrium prices?
1) price below equilibrium price= excess demand= shortage of goods in market
2) price above equilibrium price=excess supply =goods unsold
Define:
Excess demand
Excess supply
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
Total revenue is same as
Total expidenture
GRAPHS
if demand increases…
if supply increases…
price will rise, D1-D2
price will fall- S2-S1
market forces
market forces are…
actions of buyers and sellers that cause prices of G&S to change without being controlled by government
…always pushing prices towards market equilibrium
-1<0<1=
Inelastic
Luxury good
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
YED is used by business to help them decide what products and services they should offer in order to increase sales
Price elasticity of demand
Price elastic demand
Price inelastic demand
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
Factors influencing PED
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
Income elasticity of demand
Inferior goods
Normal goods
Income elastic goods (vv for income in elastic)
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
Factors influencing income elasticity of demand
1) the price of a product relative to incomes-
2) nature of good
- necessities are income inelastic
- Luxury goods are income elastic
Discretionary expenditure
Non essential spending or spending that is not automatic
The significance of income of elasticity of demand
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
Significance of income of elasticity of demand
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
