Theme 1.2 The market Flashcards
What is demand
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.
What is the basic law of demand
The basic law of demand is that demand varies inversely with price – lower prices make products more affordable for consumers
How much does demand respond if price is inelastic
demand responds little to changes in prices
How does demand respond if price is elastic
demand responds greatly to changes in prices
What are some causes in change of demand
Price, income, seasonal events, External shocks, change in tastes/fashion/trends/preferences
What is the income effect
All fall in price increases the purchasing power of consumers
What is the substitution effect
A fall in the price of good X makes it relativley cheaper compared to substitutes so consumers will buy more of it
What are some products that are effected by seasonal factors
Easter chocolate, summer fruits, winter clothing, ski season products
What is supply
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
What is the basic law of supply
The basic law of supply is that as price of a product rises, supply increases
What are the main causes of changes in supply
Costs of production, external shocks, new technology, taxation and subsidies
What does lower unit costs mean
A business can supply more at each price (Higher productivity)
What does higher unit costs mean
An inward shift of supply (a rise in wage rates or an increase in energy prices)
What is a subsidy
Any form of government support
What are some examples of subsidies
Childcare for working families, biofuel for farmers, wind farm investment, apprenticeship schemes
What is market equilibrium
Where demand and supply are the same
What is market disequilibrium
Demand and supply are out of balance
What is the equation for Total revenue (TR)
TR = Price (P) x Quantity (Q)
What is elasticity
Measures the reponsiveness of demand to a change in a relevant variable E.g Price or income
What effect does inelastic goods have to price
Price does not significantly impact sales (Usually necessities)
What effect does elastic goods have to price
Price change makes a large impact on sales (Usually luxuries)
Formula for PED
PED = % change in quantity demanded/ % change in price
What is price elasticity of demand
Measures the extent to which quantity of a product demanded is affected by a change in price
is price elastic or inelastic when PED>1
Elastic
Is price elastic or inelastic when PED<1
Inelastic
What is income elasticity of demand
Measures the extent to which the quantity of a product demanded is affected by a change in income
Formula for YED
YED = % change in quantity demanded/ % change in income
A rise in income will result in increase or decrease in normal goods
Increase
What good has YED of less than 1 (As income rises, demand falls)
Inferior goods
What are some drawbacks of calculating YED
Markets are subject to rapid change in technological change (past data less reliable)
Other factors affect demand e.g consumer tastes
What is a good strategy for making demand more price inelastic
Building strong brands and product USPs
