1.2 - The Market

What is demand?

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?

Demand varies inversely with price

What causes a movement along the demand curve?

Change in price

What causes a shift in the demand curve?

Change in any other factor

What causes shifts in the demand curve?

Price

Income

Fashion/tastes/preferences

Advertising & branding

External shocks

Seasonal factors

Substitutes and complementary goods

What does a shift to the right in demand indicate?

An increase in demand

What does a shift to the left  in demand indicate?

A decrease in demand

How does consumer incomes affect the demand for necessities?

Stays the same (inelastic)

How does consumer incomes affect the demand for luxuries?

Higher income = more demand for luxuries (elastic)

How does consumer incomes affect the demand for inferior goods?

Higher incomes = lower demand because customers may switch to better quality products

What is a complementary good and give an example

Bought alongside a good/service, fish and chips

What type of correlation is there for complementary goods?

Negative, price of good A increases = demand for good B decreases

What is a substitute product and give an example

Alternative which creates competition, Coca Cola and Pepsi

What type of correlation is there for substitute products?

Positive, price of good A increases = demand of good B increases

What is supply?

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

What is the basic law of supply?

Supply varies directly with price

What causes a movement along the supply curve?

Change in price

What causes a shift of the supply curve?

Change in any other factor

What does a shift to the right in supply indicate?

Increase in supply

What does a shift to the left in supply indicate?

Decrease in supply

What are the causes of change in supply?

Costs of production

External shocks
New technology

Indirect taxation

Subsidies

What are subsidies?

Finance provided by the government to encourage suppliers to produce goods and services by making it cheaper to make a product

What is the difference between taxation and indirect taxation?

Taxation is a charge placed on individuals or firms, indirect is placed on goods and services

What is a market?

Where buyers and sellers interact with the aim of purchasing and selling goods and services

What is market equilibrium?

When there is a balance between demand and supply in a market

What is the difference between market demand and market supply?

Market demand is the total quantity (volume) demanded for a product in a market by all customers and market supply is the total quantity supplied to a market by suppliers

How is market equilibrium seen on a supply and demand diagram?

The point where the supply and demand curve cross

What is equilibrium price known as?

Market clearing price - all products will be sold at this price

What will a change in demand or supply do to the equilibrium price?

Make a new one

How does an increase in demand affect equilibrium price and quantity?

Higher equilibrium price and equilibrium quantity

How does a decrease in demand affect equilibrium price and quantity?

Lower equilibrium price and quantity

How does an increase in supply affect equilibrium price and quantity?

Lower equilibrium price and higher equilibrium quantity

How does a decrease in supply affect equilibrium price and quantity?

Higher equilibrium price and lower equilibrium quantity

What will excess supply force businesses to do and why?

Lower prices because it is better to sell at a lower price than not at all

What will excess demand signal businesses to do?

Raise prices to generate more profit

What does elasticity measure?

The responsiveness of demand to a change to price or income

What relationship is there between price and demand?

Inverse

What does price elasticity of demand measure?

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

How is PED calculated?

% change in quantity demanded / % change in price

Why will the PED always be a negative value?

Price and demand are in an inverse relationship

If the PED is between 0 and -1, is the demand elastic or inelastic?

Inelastic

What does price inelastic demand mean?

Change in price will lead to a less than proportional change in demand (demand is not sensitive to price changes)

If PED is greater than 1, is the demand price elastic or inelastic?

Elastic

What does price elastic demand mean?

Change in price will lead to a more than proportional change in demand (demand is sensitive to price changes)

What is it called when the PED is exactly -1?

Unitary price elasticity (change in demand = change in price)

Explain the factors that affect PED

Brand strength - strong brand loyalty = inelastic

Amount of competition there is for the same type of products - lots of competition = elastic

Necessity - more necessary = inelastic

Habit - more of a habit = inelastic

Availability of substitutes - lots of alternatives = elastic

Time - short term price changes = less elastic than long term

The proportion of income spent on a product - small proportion of income = inelastic

What does income elasticity of demand measure?

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

What is the formula for YED?

% change in quantity demanded / % change in income

For most normal products what will a rise in consumer income result in?

A rise in demand

For most normal products what will a fall in consumer income result in?

Fall in demand

What is the YED value for luxuries?

More than 1

What is the YED value for necessities?

Less than 1, but more than 0

Describe the relationship between income and luxuries

As income grows, proportionally more is spent on luxuries

Describe the relationship between income and necessities

As income grows, proportionally less is spent on necessities

Describe the relationship between income and inferior goods

As income rises demand falls because substitute products become affordable and consumers switch to better alternatives

Which products have a YED of less than 1?

Inferior goods

What is the range for inelastic YED?

0 to 1

What is the range for elastic YED?

1+

What are limitations of using elasticities?

Difficult to get reliable data on how demand changes in relation to price/income

Other factors may affect demand

Many markets are subject to rapid technological change which makes previous data less reliable

What factors affect YED?

Necessity or luxury

Level of income (poorer = more income spent on necessities, wealthier = more income spent on luxuries)

What are external shocks?

Unexpected events outside of a business' control that have a direct impact on the level of supply