Theme 1.2 The market

Question 1

What is demand

Answer 1

Demand for a good or service is the quantity that customers are willing and able to buy at a given price in a given period of time.

Question 2

What is the basic law of demand

Answer 2

The basic law of demand is that demand varies inversely with price – lower prices make products more affordable for consumers

Question 3

How much does demand respond if price is inelastic

Answer 3

demand responds little to changes in prices

Question 4

How does demand respond if price is elastic

Answer 4

demand responds greatly to changes in prices

Question 5

What are some causes in change of demand

Answer 5

Price, income, seasonal events, External shocks, change in tastes/fashion/trends/preferences

Question 6

What is the income effect

Answer 6

All fall in price increases the purchasing power of consumers

Question 7

What is the substitution effect

Answer 7

A fall in the price of good X makes it relativley cheaper compared to substitutes so consumers will buy more of it

Question 8

What are some products that are effected by seasonal factors

Answer 8

Easter chocolate, summer fruits, winter clothing, ski season products

Question 9

What is supply

Answer 9

Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given time period

Question 10

What is the basic law of supply

Answer 10

The basic law of supply is that as price of a product rises, supply increases

Question 11

What are the main causes of changes in supply

Answer 11

Costs of production, external shocks, new technology, taxation and subsidies

Question 12

What does lower unit costs mean

Answer 12

A business can supply more at each price (Higher productivity)

Question 13

What does higher unit costs mean

Answer 13

An inward shift of supply (a rise in wage rates or an increase in energy prices)

Question 14

What is a subsidy

Answer 14

Any form of government support

Question 15

What are some examples of subsidies

Answer 15

Childcare for working families, biofuel for farmers, wind farm investment, apprenticeship schemes

Question 16

What is market equilibrium

Answer 16

Where demand and supply are the same

Question 17

What is market disequilibrium

Answer 17

Demand and supply are out of balance

Question 18

What is the equation for Total revenue (TR)

Answer 18

TR = Price (P) x Quantity (Q)

Question 19

What is elasticity

Answer 19

Measures the reponsiveness of demand to a change in a relevant variable E.g Price or income

Question 20

What effect does inelastic goods have to price

Answer 20

Price does not significantly impact sales (Usually necessities)

Question 21

What effect does elastic goods have to price

Answer 21

Price change makes a large impact on sales (Usually luxuries)

Question 22

Formula for PED

Answer 22

PED = % change in quantity demanded/ % change in price

Question 23

What is price elasticity of demand

Answer 23

Measures the extent to which quantity of a product demanded is affected by a change in price

Question 24

is price elastic or inelastic when PED>1

Answer 24

Elastic

Question 25

Is price elastic or inelastic when PED<1

Answer 25

Inelastic

Question 26

What is income elasticity of demand

Answer 26

Measures the extent to which the quantity of a product demanded is affected by a change in income

Question 27

Formula for YED

Answer 27

YED = % change in quantity demanded/ % change in income

Question 28

A rise in income will result in increase or decrease in normal goods

Answer 28

Increase

Question 29

What good has YED of less than 1 (As income rises, demand falls)

Answer 29

Inferior goods

Question 30

What are some drawbacks of calculating YED

Answer 30

Markets are subject to rapid change in technological change (past data less reliable)

Other factors affect demand e.g consumer tastes

Question 31

What is a good strategy for making demand more price inelastic

Answer 31

Building strong brands and product USPs