theme 1 Flashcards
what are the causes of changes in demand?
Price- for most (normal) goods a fall in price should result in an increase in demand. The extent of the change depends in the PED
incomes- As incomes rise, demand should normally rise. However for inferior goods, demand will fall as consumers choose better alternatives that are now affordable.
fashions, tastes and preferences- demand for products which are fashionable will experience sharp fluctuations
advertising and branding- A key purpose of this is to stimulate demand
external shocks- A sudden and often significant change in the external environment
seasonal factors- seasonal peaks in demand
what is demand?
the quantity that customers are willing and able to buy at a given price in a given period of time
what is supply?
the quantity of s good or service that a producer is willing and able to supply onto the market at a given price in a given time period
what is the basic law of supply?
as the selling price of a product rises, so businesses expand supply to the market, the higher selling price acts as a incentive for businesses to produce more and it may also attract other suppliers into the market
what are the income and substitution effects of a change in price?
income effects- a fall in price increases the purchasing power of customers. this allows customers to buy more within a given budget, for normal goods demand rises with an increase in incomes
substitution effects- a fall in the price of good X makes it relatively cheaper compared to substitutes, some customers will switch to good X leading to higher demand, much depends on whether products are close substitutes
what is a equilibrium?
when there is a balance between demand and supply. if something happens to disrupt that equilibrium then the forces of demand and supply respond until a new equilibrium is established
what is price elasticity of demand?
measures the extent to which the quantity of a product demanded is affected by a change in price
it is calculated by percentage change in quantity demanded divided by percentage change in price
what is income elasticity of demand?
measures the extent to which the quantity of a product demanded is affected by a change in income.
it is calculated by percentage change in quantity demanded divided by percentage change in income
what are the factors affecting PED?
brand strength- products will strong brand loyalty and reputation tend to be price inelastic
necessity- the more necessary a product the demand tends to be inelastic
habit- products that are demanded and consumed as a matter of habit tend to be price inelastic
availability of substitutes- demand for products that have lots of alternatives tends to be price elastic
time- price changes tend to have les impact on demand than over longer periods
luxuries?
as income grows, proportionally more is spent on luxuries
income elasticity more than 1
necessities?
as income grows, proportionally less is spent on necessities
income elasticity less than 1 but more than 0
what are the limitations of using elasticities?
it can be difficult to get reliable data on how demand changes in relation to price, other factors affect demand (e.g consumer tastes), many markets subject to rapid technological change making previous data less reliable, competitors will react.
how does costs of production cause changes in market supply?
lower unit costs mean that a business can supply more at each price
higher unit costs cause an inward shift of supply
how does external shocks cause changes in market supply?
significant and often unexpected changes in the external business environment usually impact on market supply
how does technology cause changes in market supply?
technological change encourages new entrants to a market and can also enable existing suppliers to become more efficient
