Theme 1 section 3 Flashcards
What is effective demand
effective demand is where people have to ability to pay (sufficient purchasing power)
price mechanism is related to effective demand
What are wants
wants are what people would like to buy- unsupported by the ability to pay
What is the law of demand
states that demand for a product varies inversely with its price
Which is why a demand cure slopes left to right
What was does a demand cure slope
Downward from left to right
What does ceteris paribus mean
means other things remaining the same
only one changing variable can be predicted
in this case price
Why is there Movement along demand curve
Any change in price will cause movement along the demand curve
What movement will occur on the demand curve if the price of the good decreases
if the price decreases more people want to buy so quantity demanded increases
This is known as extension
And down
What movement will occur on the demand curve if the price of the good increases
if the price increases people are less likely to buy so demand decreases this is known as contraction
and up
What way does the demand curve move if demand is increased
Right
what way does the demand curve move if demand decreases
left
what is contraction and extension for
price only
What is a normal good
a normal good is one which if price rises the demand will fall
What is rational choice
Economists make the assumption that consumers behave in a rational way - that all individuals make logical decisions that maximise their personal benefit (utility- personal satisfaction)
What is utility
utility is the satisfaction gained from consuming goods and services
can be measured by the price people are willing to pay for it
What is marginal utility
It is the additional satisfaction gained from consuming an extra unit of goods
What is total utility
The total amount of satisfaction gained from consuming a product in a period of time
Total utility is the sum of all marginal utilities gained from each unit consumed
What are the three reasons a demand curve slopes dwonward from left to right
-diminishing marginal utility
- the income effect
- The substitution effect
What is diminishing marginal utility
the more we consume of a good the less satisfaction (utility) we get from consuming one more unit of it. The more of the good we consume the less we are willing to pay
When the price falls we gain more utility, they buy more of this good and less of another
What is the income effect
As the price of a good falls existing consumers will see a rise in their ‘real income’
They have more income left over
Also lowering price opens them up to a wider market as it is now in more consumers income bracket
What is the substitutional effect
As the price of a product decreases it becomes relatively cheaper compared to rival goods, consumer demand then shifts towards cheaper alternatives
rational consumer shifts towards alternatives
What are other causes of shifts
tastes/trends/tech
income
marketing
changes in the econmy
changes in the price of complimentary goods
other factors
changes in population
changes in the price of substitutes
How does trend/tech/tastes effect demand
trends and fashions or advancement change consumers preferences so effect shifts in demand
Recent surges in smoothies and healthy drinks and therefore fall in demand for cola
demand falls for dvds after acessing films through netflix
How does income effect demand
When an individuals income goes up their ability to purchase increases causing an outward shift in demand curve
E.g demand for air travel has increased as a result of rising income
How does marketing affect demand
Firms invest huge amounts in marketing and advertising to make more consumers buy
Good campaigns mean demand will rise
How does changes in the economy affect demand
Economic conditions effect demand for goods
A recession in the economy reduces the demand for goods and services
demand for goods bought on credit are sensitive to the rate of interest
if risen demand falls
if more credit is available demand increases
strength of pound determines fall or increase in demand for foreign holidays
How does the change in price of complementary goods affect demand
complementary good are goods that are consumed in pairs
if the price of one goes up the demand for both will fall
Joint demand
How do other factors affect demand
Terrorist attacks reduce demand for certain holiday destinations
Health scares regarding certain goods
weather affects demand for hot drinks or cold ice creams
Also expectations of price rises- they buy more
How does changes in population affect demand
The migration of immigrants has seen the rise in demand for polish food shops
people are living longer so higher demand for mobility cars
How does the change in price of a substitute affect demand
substitute goods in competitive demand act as a replacement for others
rise in esso petrol leads more people to go to other garages e.g shell
What is the mnemonic for determinants of demand
TIMECOPS
T aste
I ncome
M arketing
E conomy
C omplimetary
O ther
P opulation
S ubstitutes
What does joint demand mean
joint demand is when there is two or more products are demanded and then consumed together e.g smartphones and apps
they are interdependent of each other
customers get maximal utility when they are consumed together
Joint demand products are complimentary goods
What is competitive demand
This is when two or more products rival each other
e.g virgin media and sky
these are substitute goods
what is derived demand
This is when a demand for a product is a result of the demand for something else
e.g labour
an increase in demand for steel leads to an increase in demand for steel workers
What are the three exceptions to the law of demand (abnormal demand)
Giffen goods
Veblen goods
Speculative goods
what are giffen goods
giffen goods are inferior goods
e.g rice,potatoes, beans
this goes against the law of normal demand because if the price goes up low income consumers buy more instead of buying more expensive products like meat
typically associated with third-world developing countries, where they can only afford the stables to survive
they can no longer afford meat so buy more of the inferior rice,beans and potatoes
What are veblen goods
veblen goods are luxury goods
e.g diamonds and rolexes
they are highly priced and unaffordable to many
People buy them mainly for the prestige value of the product
When the price falls people associate the prestige value as falling
so quantity demanded falls with the price
what are speculative goods
speculative goods are when a customer acts as a speculator
when prices are rising a customer buys large quantities of commodity out of anticipation that the price may still go up
when prices are expected to fall they wait to buy goods in the future for cheaper prices
so quantity demanded falls when prices fall
Some speculative goods are bought purely for investment not consumption
e.g shares,antiques and houses
What is price elasticity of demand
price elasticity of demand is a measure of the reactiveness of the quantity demanded to changes in price
it mesures the extent of which quantity demanded will change following a price change
How is price elasticity measured
by dividing
the percentage change of the quantity demanded/ percentage change in price
Ped 0 meaning
perfectly inelastic
means the quantity demanded doesn’t change when the price changes - vertical demand curve
Ped 0-1 meaning
inelastic
the percentage change in demand is smaller than the change in demand
Ped 1 meaning
unit elastic
the percentage change in quantity demanded is exactly the same as the percentage change in price
Ped bigger than 1
elastic
demand responds more than proportionately to the change in price
why is the shape of an inelastic demand different to elastic
elasti demand is like a common supply and demand diagram whereas inelastic is straighter and more steep
what are the factors affecting elasticity
availability of substitutes
price relative to total spending
habit
frequency of purchase
Necessity
the time allowed following the price change
Brand loyalty
How does availability of substitutes affect elasticity
The more close substitutes in the market the more elastic the product will be because the consumers can easily switch to another product
e.g range of package holidays
This has been heightened by money comparing websites
e.g money supermarket
-so consumers have full transparency
How does price relative to total spending affect elasticity
Goods and services that take up a high proportion of households income will be more elastic
e.g matches which are low in price will be inelastic as a household wont notice the increase majorly
How does habit affect elasticity
The more commodity is considered to be a necessity the more demand will be inelastic
e.g petrol, cigarettes
How does frequency of purchase affect elasticity
products that are bought frequently are price inelastic
e.g fresh milk
when they aren’t bought often and can be postponed the demand becomes elastic
How does necessity effect elasticity
products that are seen as essential
e.g bread, petrol or heating
are highly inelastic
but competition within these markets makes in elastic
How does the time period allowed following a price change affect elasticity
the short term is elastic but if they waited longer customers can change to different products and respond to price fluctuations
e.g soaring fuel people may move to solar power in the future
How does brand loyalty affect elasticity
if consumers have high brand loyalty the price becomes more inelastic
what is the impact on revenue if the price is inelastic
if price is inelastic
increasing price would increase total revenue
reducing price would reduce total revenue
What is the impact on revenue if the price is elastic
if price is elastic
increasing the price would reduce total revenue
reducing price would increase total revenue
How do producers try make price more inelastic
developing customer loyalty through advertising
giving guarantees and good after sale service
offering perks e.g loyalty schemes like cards or newspaper tokens
taking over rivals to get a bigger market share and monopoly
offering easy credit and flexible payment packages
tying consumers into long term contracts - for elasticity
why is price elasticity important to businesses
Firms can use elasticity to estimate the effect of change in price on total revenue
they can predict the likely price volatility (price fluctuations of a product)
why is price elasticity important to the government
Government wants to know the effect on tax revenue if they change an expendature tax
e.g sin tax- but this is for inelastic products
used to measure emissions- gas guzzling cars in londons charge is increasing
Why is price elasticity important for imports/exports
The impact of charges in the exchange rate on the demand for imports and exports
What is supply
supply is the quantity of a good or service the producer is willing and able to sell onto the market at a given price at a given time
What is the law of supply
That as the market price of a commodity rises, so producers expand the quantity they supply to the market
What is an individual supply curve
this refers to the quantity of a good that a firm is willing to supply at a certain price
What is a market supply curve
the total quantity of a good that all firms in the market would be willing and able to supply
What causes movement along a supply curve
any change in price
if price goes up what happens along the supply curve
if price increases frims will supply more this is shown as extension / up
If the price of a good decreases what happens along the supply curve
if the price decreases then the firm supplies less which is contraction which is down
what are the three main reasons why a supply curve has that shape
The profit motive
production and costs
New entrants into the market
what is the profit motive effect
when the market price rises it becomes profitable for the business to increase output
what does production and costs do
when output is increased a firms production costs may rise in order to cope with increased output . Therefore higher price is needed to justify the extra costs of production
what does new entrants into the market do
higher prices make it easier for a new entrant to enter the market leading to an increase iof supply for customers to buy
what is joint supply
joint supply is where the supplky of one good automaticly leads to the supply of another
What is competitive supply
competitive supply is when a buisness can make alternate gioods
what way does the supply curve shift if supply is increased
supply moves to the right (below)
what way does the supply curve move if the supply is reduced
supply moves to the left (above)
what does a change in the price of substitute products do to the supply curve
producers will swap to supplying substitute products if there price goes up there is more profit available
What does government intervention do to supply curve
a tax increases the cost for producers and therefore supply shifts to the left
whereas government subsidy increases supply
what does changes in methods of production do to supply
can lead to a rapid increase in supply leads to a fall in costs
what does changes in the cost of production do
lower cost of production leads to the producers being able to supply more
how do other factors affect supply
other factors e.g weather
food production
climate change
what are the effectors of supply remembered by
Substitutes
Intervention (GOV)
Methods of production
Cost of production
Others
What is a market
A market is a place where buyers and sellers come together to exchange goods/services at a particular price/quantitiy
What is equlibrium price
quantity demanded by customers is the same as the quantity supplied by suppliers
The market will be cleared
Also known as MARKET CLEARING PRICE
invisable hand
What does the triangle above the market clearing point mean
excess supply =surplus
what does the triangle below market clearing point mean
excess demand = shortage
what is the price mechanism
used to describe the interaction of the decisions of customers and firms to determine allocation of resources
what is the price mechanism also referred to as
The invisible hand
when does the rationing function occur
this occurs when an increase in demand or reduction of supply causes a price rise
when does the signalling function occur
this occurs when changing prices give a signal to customers and producers as to weather they should leave or enter the market
e.g higher prices suggest the customer should buy less
When does the incentive function occur
this occurs when a customer or a producer is motivated to a course of action e.g higher prices will incentivise a producer to supply more of the good/service
What are the price mechanisms three main functions
rationing function - prices allocate limited supply
signalling function- prices signal information about the market
incentive function- prices provide agents with incentives to alter their behaviour
what does the rationing function do
excess demand fir a good/service will lead to a rise in price this is due to scarcity
the price rise will then lead to a reduction in demand
What does the incentive function do
the incentive function higher prices act as a motivator to producers to increase their supply
they therefore increase supply to make more profit
Leads to greater contribution per unit
i.e the difference between selling price and variable cost (the change in cost as the output increases)
What does the signalling function do
An increase in price indicates to producers that they should buy more but signals to consumers they should buy less
as a price decreases producers supply less and as price decreases consumers buy more
What is allocative efficiency
occurs when society is producing good to match the needs of consumers
customer satisfaction is maximised in the production
At this point quality supplied and quality demanded will be the same
Therefore firms react to a change in demand
because they aim to profit maximise
what is the effect of price mechanism in mass markets
In mass markets they target all consumers and its not segmented
Therefore suppliers produce in bulk which leads to a lower unit cost
so they can sell high volumes at low prices
What is the effect of price mechanism in niche markets
A niche market identifies small gaps
target market is well defined with distinct characteristics
this is specialism meaning the firm can charge higher prices
What is the effect of the price mechanism for potential market growth
the price mechanism shows firms what goods/services to supply
Firms follow different trends in markets to decide what to produce in the future
may reallocate resources and maximise profits
What are the limitations of supply and demand diagrams
supply and demand looks at competitive markets however actually the competition varies
ceteris paribus principle - in the dynamic market things change
more variables cause change
not full information
What is market research
market research is the collection and analysis of data and information to inform a business about a market
data is collected to
- identify and anticipate customers needs and wants
- quantify likely demand
- gain insight into consumer behaviour
what is primary research
primary research is also known as field research
involves the data collection of first hand data which didn’t exist before (origional data)
What is secondary data
secondary data is market research (desk research) which has already been undertaken by another organisation
the research already exists
What are examples of primary research
postal surveys
telephone questionnaires
or face to face or online
in depth interviews
focus groups
observations
what are examples of secondary market research
national and local governments
e.g office of national statistics
market research organisations
professional bodies
academic organisations e.g uni
newspapers and magazines
what is qualitative data
is research which is non-statistical information that gives an in depth insight for the reasons of human behaviour
what is quantitative data
gathering research which is statistical data to inform of the behaviours but doesn’t explain why
what are the limitations of qualitative and quantitative
qualitative gives an in depth insight to behaviours
quantitative informs businesses but don’t explain why
what does the value of sampling depend on
the sample technique used
how the sample was carried out
the size of a sample
What does the size of the sample depend on
the budget available
the importance of accuracy
What are the types of sampling techniques
random
quota
stratified
what is random sampling
random sampling is a sample selected for the study of a population where each individual is chosen entirely by chance and has an equal chance of being selected
what is quota sampling
The population is first segmented into sub groups before a judgement is made in selecting respondents that are representative of that subgroup
e.g in a womens sub group 60% are 20-40 and the sample should represent this
what is stratified sampling
the population is first segmented into subgroups before respondents are randomly selected from within the subgroups before respondents are randomly selected from that subgroup
e.g within a subgroup of 16-18 year olds any member of that population has an equal chance of being selected
what is market segmentation
market segmentation is when the market is split into subgroups of consumers with similar characteristics
this helps identify different types of consumers and their different wants and needs
what are different segmentation methods
demographic
income
behavioural
geographical
what is demographic segmentation
this identifies subgroups of the population based on their demographic profile or characteristics
demographic looks at the social and economic characteristics of individuals and households
what are examples of demographic segmentation
age
gender
level of education
race
religion
family size
stage in life
what is geographical segmentation
identifies groups of the population based on where they live e.g regions, cities or neighbourhoods
tastes vary between countries
infrastructure is different in rural areas compared to cities
what is income segmentation
identifying groups of the market based on their levels of income and profession
e,g socio- economic subgrouping
A- high managerial such as chief executives and directors
B- intermediate managerial e.g solicitors, accountants and doctors
C1- supervisory, clerical or junior professionals like teachers or junior managers
C2- skilled manual such as plumbers, electricians and carpenters
D- semi and unskilled workers such as refuse collectors and window cleaners
E- pensioners, casual workers, students and unemployed
What is behavioural segmentation
characteristic subgroups based on behavioural patterns of consumers father than characteristics
- reasons for making purchase
-frequency of purchase e.g heavy or light user
-Time of purchase e.g seasonal, weekly
-brand loyalty
-method of purchase e.g online
-triggers e.g response to marketing
What are the benefits of market segmentation
advertising can be marketed at specific market segments so that advertising spending is more effective
the more profitable and least profitable customers can be identified
least profitable market can be avoided
becomes easier to identify new products
it helps the firm to improve existing products and customer service
What is positioning
where a product is placed in the market relative to its competitors
positioning can be changed through changing elements of the marketing mix to meet the needs of target market
What are influences of positioning
internal constraints e.g budget
internal strengths e.g creativity and innovation
market conditions e.g degree of competition
external environment e.g state of the economy
What is market mapping
market mapping is a diagrammatic technique that enables businesses to display the perceptions of customers
uses criteria of two different variables to compare products
It is used to identify what segment of the market is underprovided and look at producing a product which fills the gap
What are the advantages of market mapping
market mapping allows firms to be able to identify gaps in the market
this helps firms develop products or services that meet the needs or improve its existing products to compete better
shows insight to different segments of the markets behaviours
can develop more effective marketing and advertising to target specific customers
can identify prices compared to competitors
can differentiate pricing based on the market
What are the disadvantages of market mapping
can be overly simplistic and does not provide a comprehensive understanding of the market
mapping relies on limited variables such as price or features
does not accurately reflect current market
does not include unexpected events
only focuses on existing market not new and emerging
limits the organisations ability to identify new opportunities or understand how the market will change in the future
have to use informed information
what is competitive advantage
competitive advantage is a feature of a business that allows it to preform more successful than others in the market
same quality at a lower price
superior product achieved through differentiation
what factors contribute to competitive advantage
product differentiation
ability to add value
operational efficiency
position relative to competitors
what is michael porters competitive advantage
michael porters generic strategy states that a firm can enjoy a competitive advantage if it is either
lowest cost
highest differentiated
he emphasised the danger of the middle ground
what is adding value
Added value is the difference between the selling price and the cost price of a good close goodA product that can be touched
the business creates something new/innovative for their product that sets them apart from competition
how can value be added
manufacturing
marketing
technology
customer service
usp
what are the forms of markets
online
national
local
physical
