1.2 - Market

A set of 35 key vocabulary terms and definitions covering demand, supply, market equilibrium, price elasticity of demand (PED), and income elasticity of demand (YED) from Edexcel A-Level Business notes.

Demand

Refers to the number of goods/services customers are willing to buy at a given price.

Effective Demand

Occurs when customers are willing and able (they have the money) to buy at a given price.

Inverse Relationship of Demand

The relationship where an increase in price leads to a decrease in quantity demanded, and a decrease in price leads to an increase in quantity demanded.

Movement Along the Demand Curve

A change in quantity demanded caused solely by a change in the price of the product.

Non-Price Factors Affecting Demand

Factors other than price that cause the entire demand curve to shift to the left or right.

Substitute Goods

Replacement goods (e.g., different car brands) where an increase in the price of one leads to an increase in demand for the other.

Complementary Goods

Goods that are consumed together (e.g., cars and petrol) where an increase in the price of one leads to a fall in demand for the other.

Normal Goods

Goods for which demand increases as a consumer's income rises (e.g., branded goods like Superdry hoodies).

Inferior Goods

Goods for which demand increases as a consumer's income falls (e.g., own-label supermarket products).

Demographics

The structure or size of a country's population, changes in which alter the demand for specific products.

Seasonality

The variation in demand for goods and services at different times of the year.

External Shocks

Unexpected events, such as the outbreak of Covid-19, that cause sudden changes in demand or supply.

Supply

The number of goods/services businesses are willing to sell at a given price in a specific time period.

Direct Relationship of Supply

The relationship where an increase in price causes quantity supplied to increase, and a decrease in price causes quantity supplied to decrease.

Movement Along the Supply Curve

A change in quantity supplied caused solely by a change in the price of the product.

Non-Price Factors Affecting Supply

Influences such as costs of production, external shocks, and indirect taxes that shift the entire supply curve left or right.

Indirect Taxes

Taxes placed by the government on businesses (e.g., UK VAT rising from $17.5\%$ to $20\%$ in 2011) that raise production costs and shift supply left.

Government Subsidies

Financial support provided by the government to businesses that reduces production costs and shifts the supply curve to the right.

Market

Any physical or virtual place that brings buyers and sellers together to trade at an agreed price.

Equilibrium Price

The price where quantity demanded equals quantity supplied, satisfying both buyers and sellers.

Market Surplus

A situation where the price is set above equilibrium, causing supply to be greater than demand.

Market Shortage

A situation where the price is set below equilibrium, causing demand to be greater than supply.

Price Elasticity of Demand (PED)

A measure of how responsive the change in quantity demanded is to a change in price.

PED Formula

$$\text{PED} = \frac{\% \Delta \text{ in QD}}{\% \Delta \text{ in P}}$$

Percentage Change Formula

$$\% \text{ Change} = \frac{\text{new value} - \text{old value}}{\text{old value}} \times 100$$

Price Elastic Demand

Demand with a PED value of $-1$ or lower (e.g., less than $-1$), where the percentage change in quantity demanded is more than proportional to the percentage change in price.

Price Inelastic Demand

Demand with a PED value between $0$ and $-1$, where the percentage change in quantity demanded is less than proportional to the percentage change in price.

Brand Loyalty

Marketing-driven consumer preference (e.g., Coca-Cola's average $\$4\text{bn}$ annual advertising spend) that shifts demand right and makes it more price inelastic.

Competitive Pricing Strategy

A pricing strategy best employed for products with price elastic demand, where reducing the selling price increases total revenue.

Price Skimming Strategy

A pricing strategy best employed for products with price inelastic demand, where raising the selling price increases total revenue.

Income Elasticity of Demand (YED)

A measure of how responsive the change in quantity demanded is to a change in income.

YED Formula

$$\text{YED} = \frac{\% \Delta \text{ in QD}}{\% \Delta \text{ in Y}}$$

Luxury Good (YED)

A normal good with a YED value greater than $1$, indicating that demand is highly responsive to changes in income.

Necessity Good (YED)

A normal good with a YED value between $0$ and $1$, indicating that demand is not very responsive to changes in income.

Business Cycle

The fluctuations an economy experiences over time, progressing through stages from recession to recovery and growth.