Theme 2, 2.2 Firms, consumers and Elasticities of Demand Flashcards

1
Q

Define Price Elasticity of Demand

A

Measures the response of quantity demanded to changes in price.

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2
Q

Define Price Elastic Demand

A

Where quantity demanded changes by a higher percentage than price.

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3
Q

Define Price Inelastic Demand

A

If quantity changes by less than the percentage change in price.

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4
Q

PED calculation

A

% change in quantity demanded
/ % change in price

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5
Q

Define Perfectly inelastic

A
  1. Price changes have no effect on quality.
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6
Q

Define Inelastic

A

Between 0 and -1 Quantity demanded changes by a smaller percentage as a result of price changes.

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7
Q

Define Unit elasticity

A

-1. Quantity Demanded changes by the same % as price.

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8
Q

Define elastic

A

Between -1 and infinity. Price changes lead to a more than proportionate (bigger percentage) change in quantity demanded.

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9
Q

Define Perfectly elastic.

A

-Infinity. Any price increases cause demand to fall to zero, whilst a price cut leads to more demand than the firm can cope with.

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10
Q

Define Necessity

A

These are items that are needed, something that you must have in order to live properly or do something. Tend to be goods on which poorer people spend a larger proportion of their incomes than richer people.

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11
Q

Define substitutes

A

Products that can be used as alternatives to one another to satisfy a particular need or want.

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12
Q

Define Luxury

A

Luxury items are the opposite of necessity goods or need expenses, which are the goods that people buy regardless of their income level or wealth.

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13
Q

Define Competitive pricing

A

Involves the setting of prices based on what rivals are charging, strong competition in the market.

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14
Q

Define Cost plus pricing

A

The price is decided by adding a fixed % of profit onto the cost or additional costs.

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15
Q

Define Skimming

A

Involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition- usually due to some technological features.

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16
Q

Define Penetration pricing

A

Is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price. Often used to gain market share.

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17
Q

Define Predatory pricing

A

With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition.

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18
Q

Define Psychological pricing

A

A pricing tactic that is designed to appeal to customers who use emotional rather than rational responses to pricing messages.

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19
Q

Define Promotional pricing

A

Usually involves offering a discount to consumers on the normal selling price of a product, or more of the product at the normal price.

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20
Q

Define Premium pricing

A

A goods price is set at a higher price than competitors to give a perception of high quality.

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21
Q

Define Pricing strategy

A

The way that a business decides which price to charge, and the factors that influence that decision.

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22
Q

Define Brand loyalty

A

Arises from distinctive features that give the product some uniqueness and attract customers to make repeat purchases, regularly choosing the product in preference to those of competitiors.

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23
Q

Define Informative

A

Designed to alert potential customers to product features. This is important when there are specific technical qualities that may be attractive.

24
Q

Define Persuasive

A

Influencing the customer by engaging their emotions.

25
Q

Define Product placement

A

Refers to branded products that are easily visible in a TV programme or film, or mentioned in a book. Public relations experts my use it as advertising.

26
Q

Define Packaging

A

Can affect sales. There has been a big increase in the availability of small packets of nuts, to meet the need for healthy snacks on the run. The packaging may be designed to be so appealing that consumers are persuaded to buy the product even if it has other distinctive features.

27
Q

Define sales offers

A

Are usually short-term techniques to encourage customers to buy. They can include money off coupons; buy one get one free offers, discounts, free samples and special offers. In effect, they lower the price temporarily. This is an example of psychological pricing.

28
Q

Define Digital media

A

Digital promotion includes Facebook pages run by the business itself; emails and online advertising, ‘advergaming’ (a video game containing an advertisement for a product), social media and viral marketing. digital promotion can be cheap yet reach large numbers of people.

29
Q

Define Sponsorship

A

Brings publicity for financially supporting an event, activity or person. Sponsorship in sport has a long history, now growing in the arts and on television. It can reach many people, millions may see a name at a sporting event or on TV. It can enhance a firm’s image and reputation but it is very expensive and it can backfire.

30
Q

Define Direct sales

A

Involve direct contact with the potential customer. This can be door-to-door but is often done by phone. The message can be adapted to suit the customer as the conversation progresses, tailoring the approach to maximise the chance of success.

31
Q

Define Public relations

A

Involves liaising with the press and media, offering information about the company. Many businesses have PR departments or use an agency to promote products by getting positive media mentions into circulation. new stories will be read or seen by many people. Publicity can focus on products, fund raising events, good works or initiatives to keep a brand in the public eye.

32
Q

Define Income elasticity of demand

A

Measure of how much quantity demanded will change when income changes ( Y= income and I= investment). Thus YED is a measure of responsiveness of demand to changes in income, just as PED measures responsiveness to changes in price.

33
Q

Define Income elastic

A

Greater than 1. An income change causes a proportionately bigger change in demand.

34
Q

Define Unitary Income elasticity

A
  1. An income change causes the same proportional change in demand.
35
Q

Define Income inelastic

A

Between 0 and 1. An income change causes a proportionately smaller change in quantity demanded.

36
Q

Define Normal Good

A

Have positive income elasticity of demand. A rise in income will lead to an increase in quantity demanded.

37
Q

Define Inferior Good

A

Have negative income elasticity of demand; demand rises as income falls.

38
Q

Define Recession

A

Defined as two quarters of falling output in the economy as a whole. Most recessions involve a longer period of very slow growth after that

39
Q

Define Boom

A

Conditions mean that incomes are rising strongly across the economy.

40
Q

Define and give the formula for Price Elasticity of Demand

A

PED is the responsiveness of quantity demanded given a change in price.

PED= % change QD / % change P

41
Q

If PED is less than 1, will QD move to a larger or smaller degree than price?

A

A change in price will lead to a smaller change in the level of quantity demanded.

42
Q

What does PED= 1 represent?

A

A unitary elastic good, whereby the change in price is equal to change in quantity demanded.

43
Q

If price increased by 22%, and the quantity demanded by 30%, is the good PED elastic or inelastic?

A

-30 / 22 =-1.36
Therefore a PED elastic good

44
Q

Name the 6 factors influencing elasticity of demand

A

1.Necessity
2.Substitutes
3.Habitual consumption
4.Proportion of income spent
5.Durability
6.Peak/off-peak demand

45
Q

How does the number of substitutes affect the elasticity of demand for the good?

A

The more substitutes there are, the more PED elastic the good is.

46
Q

Would peak demand for a good make it PED elastic or inelastic

A

PED inelastic

47
Q

If good ‘A’ is PED elastic and the price of the good increases, what happens to revenue?

A

The fall in quantity demanded is proportionally larger than the increase in price, so overall revenue falls.

48
Q

Describe the concept of price skimming

A

A short-term pricing strategy that usually occurs when a new product is released, whereby a high price is set before new firms enter the market and increase competition.

49
Q

How does predatory pricing differ from price penetration?

A

Predatory pricing aims to push incumbents out of the market, whereas price penetration aims to boost customer royalty.

50
Q

List the 3 factors that determine the most appropriate pricing strategy.

A
  1. Number of USP’s
    2.Price elasticity of demand.
    3.Stage in the product of life
51
Q

If good ‘A’ has a high PED, will firms give it a low or high price, and why?

A

A low price because the good is dependent on price so if the good was expensive, firms’ profit margins would be at risk

52
Q

Give the formula for income elasticity of demand.

A

YED= % change QD / % change Y

53
Q

Define inferior goods and give their YED value.

A

Goods that experience a reduction in demand as income falls.
YED less than 0

54
Q

Name the type of good with a YED greater than 1.

A

Normal luxury goods

55
Q

During an economic recession, what type of goods are firms more likely to produce, and why?

A

Inferior goods, because recessions usually accompany a reduction in income, so inferior goods will experience an increase in demand.