Knowt
Theme 1 Section 2: The Market
Drawing Supply and Demand Diagrams
effective demand is the quantity of a product that consumers want and are able to buy at a given price at a particular time
supply is the quantity of a product that suppliers are willing and able to supply to a market at a given price at a given time
a supply and demand diagram plots the quantity of a product in supply or demand against a range of different prices: it’s made of 2 curves, 1 for supply, 1 for demand
the demand curve usually shapes downwards as it shows that as the price of a product increases, the demand of the product decreases, which is because at a higher price, fewer people will be willing or able to buy the product
the supply curve shows the relationship between price and quantity supplied
the supply curve usually shapes upwards as it shows that the higher price charged for a product, the higher the quantity supplied
producers and sellers aim to maximise their profits because more often than not, the higher the price for the product, the higher the profit
higher profit provides an incentive to expand production and increase supply, which explains why the quantity of a product supplied increases as price increases
however, increasing supply increases cost: firms will only produce more if the price increases by more than the costs
Equilibrium Price
when the quantity that buyers demand is the same as the quantity that the sellers wish to supply, an equilibrium price and quantity is agreed
the equilibrium price is where the 2 curves meet on the supply and demand diagram
Surplus
if a price in the product was increased, this would cause a movement to the right along its supply curve and movement to the left along the demand curve
this would mean the quantity demanded would be less than the quantity supplied and so there would be excess supply and therefore a surplus in the market
Shortage
if the price of a product was decreased, this would result in a movement to the left along its supply curve and movement to the right along the demand curve
this would mean the quantity supplied would be less than the quantity demanded and so there would be excess demand and therefore a shortage in the market
Demand
if the product price increases, then the demand for the product will fall
if the product price falls, then the demand for the product will increase
factors that affect demand may include: price change for a substitute, complimentary products, consumer income, consumer preferences, advertising, demographics, seasonal changes and external shocks
Supply
the quantity of the product that a business is willing to supply is determined by the price at which the business can sell the product
as product price increases, supply will rise
factors that affect supply may include: cost of production, indirect taxes, subsidies, new technology, weather conditions and external shocks
Demand Curves and Supply Curves
changes in the market cause demand and supply to change
these changes cause demand or supply curves to change
these shifts will change the equilibrium prices and quantities
Rises in Demands
increase in customer demand shifts the demand curve to the right
the price needs to rise to clear the market of excess demands
a new equilibrium quantity is reached at a higher price
Falls in Demands
decrease in customer demand shifts the demand curve to the left
the price needs to fall to clear the market of excess supply
a new equilibrium quantity is reached at a lower price
Rise in Supply
increase in supply shifts the supply curve to the right
the price needs to fall to clear the market of excess supply
a new equilibrium quantity is reached at a lower price
Falls in Supply
decrease in supply shifts the supply curve to the left
the price needs to rise to clear the market of excess demand
a new equilibrium quantity is reached at a higher price
Price Elasticity of Demand
the price elasticity of demand is how much the price change affects the demand
price elasticity of demand = % change in quantity provided / % change in price
price elasticity of demand is always negative
if the value is bigger than 1, the product is price elastic
if the value is less than 1, the product is price inelastic
for price elastic products, the % change in demand is bigger than the % change in price
for price inelastic products, the % change in price is bigger than the % change in demand
Factors Affecting Price Elasticity of Demand
necessity products are price inelastic
demand will be price inelastic if consumers buy competitor products
loyal customers won’t switch even if prices go up, making it less price elastic
the internet makes it easier to find alternative products, therefore increasing price elasticity
product types tend to be price inelastic whereas individual brands are often price elastic
products costing a greater proportion of consumer income will be price elastic
a product that consumers buy regularly is likely to be price inelastic
price would be more elastic if competitors were to enter the market and offer alternative products
increase in brand awareness increases customer loyalty, making the product less price elastic
Demand Curve for Price Elasticity
a product that is price elastic has a shallow demand curve
this shows that the demand is very dependent on price
a small change in price leads to a large change in demand
a product that is price inelastic has a steep demand curve
this shows that the product is not very dependent on price
a large change in price doesn’t lead to a large change in demand
Price Elasticity of Demand and Revenue
sales revenue = selling price x sales volume
if a product is price elastic, a price increase will decrease sales revenue
the money lost from the % decrease in sales will be more than the money gained from the % increase in price
for price elastic products, a firm can increase sales revenue by reducing price
if a product is price inelastic, a price increase will also increase sales revenue
the money lost from the % decrease in sales will be less than the money gained from the % increase in price
if a product is price inelastic, decreasing the price will increase sales slightly, but make sales revenue decrease because the price has fallen
Income Elasticity of Demand
a person’s income can change for reasons including: a change in jobs, a promotion, getting a pay rise or being dismissed
the average income of a nation will increase during economic growth and decrease during economic decline
income elasticity of demand shows how the demand for a product changes as income changes
income elasticity of demand = % in quantity demanded / % change in income
the income elasticity of demand depends if a product is a normal product or an inferior product
normal products have a positive income elasticity of demand whereas inferior products have a negative income elasticity of demand
necessity products have a positive income elasticity of demand which is less than 1, meaning that as income rises, demand rises: but at a slower rate than income increase
luxury products have a positive income elasticity of demand which is more than 1, meaning that demand increases at a faster rate than the increase in income
inferior products are cheaper value products: often own-brand alternatives and they have a negative income elasticity of demand, meaning that demand falls as income rises and that demand rises as income falls
How Elasticity Helps Business Decisions
elasticity helps a business to decide whether to raise or decrease the price of a product
they can predict what happens to sales, and therefore also what will happen to sales revenue
if a product is price elastic, businesses are more likely to set low and competitive prices to increase revenue
if a product is price inelastic, businesses are likely to set high prices and price skimming to increase revenue
income elasticity helps a business see what will happen to sales if economy grows or shrinks
businesses that sell a range of products may decide to promote different products if incomes decrease or increase
companies may choose to promote negative income elasticity of demand products in times of low income
companies may choose to promote positive income elasticity of demand products in times of high income
Theme 1 Section 2: The Market
Drawing Supply and Demand Diagrams
effective demand is the quantity of a product that consumers want and are able to buy at a given price at a particular time
supply is the quantity of a product that suppliers are willing and able to supply to a market at a given price at a given time
a supply and demand diagram plots the quantity of a product in supply or demand against a range of different prices: it’s made of 2 curves, 1 for supply, 1 for demand
the demand curve usually shapes downwards as it shows that as the price of a product increases, the demand of the product decreases, which is because at a higher price, fewer people will be willing or able to buy the product
the supply curve shows the relationship between price and quantity supplied
the supply curve usually shapes upwards as it shows that the higher price charged for a product, the higher the quantity supplied
producers and sellers aim to maximise their profits because more often than not, the higher the price for the product, the higher the profit
higher profit provides an incentive to expand production and increase supply, which explains why the quantity of a product supplied increases as price increases
however, increasing supply increases cost: firms will only produce more if the price increases by more than the costs
Equilibrium Price
when the quantity that buyers demand is the same as the quantity that the sellers wish to supply, an equilibrium price and quantity is agreed
the equilibrium price is where the 2 curves meet on the supply and demand diagram
Surplus
if a price in the product was increased, this would cause a movement to the right along its supply curve and movement to the left along the demand curve
this would mean the quantity demanded would be less than the quantity supplied and so there would be excess supply and therefore a surplus in the market
Shortage
if the price of a product was decreased, this would result in a movement to the left along its supply curve and movement to the right along the demand curve
this would mean the quantity supplied would be less than the quantity demanded and so there would be excess demand and therefore a shortage in the market
Demand
if the product price increases, then the demand for the product will fall
if the product price falls, then the demand for the product will increase
factors that affect demand may include: price change for a substitute, complimentary products, consumer income, consumer preferences, advertising, demographics, seasonal changes and external shocks
Supply
the quantity of the product that a business is willing to supply is determined by the price at which the business can sell the product
as product price increases, supply will rise
factors that affect supply may include: cost of production, indirect taxes, subsidies, new technology, weather conditions and external shocks
Demand Curves and Supply Curves
changes in the market cause demand and supply to change
these changes cause demand or supply curves to change
these shifts will change the equilibrium prices and quantities
Rises in Demands
increase in customer demand shifts the demand curve to the right
the price needs to rise to clear the market of excess demands
a new equilibrium quantity is reached at a higher price
Falls in Demands
decrease in customer demand shifts the demand curve to the left
the price needs to fall to clear the market of excess supply
a new equilibrium quantity is reached at a lower price
Rise in Supply
increase in supply shifts the supply curve to the right
the price needs to fall to clear the market of excess supply
a new equilibrium quantity is reached at a lower price
Falls in Supply
decrease in supply shifts the supply curve to the left
the price needs to rise to clear the market of excess demand
a new equilibrium quantity is reached at a higher price
Price Elasticity of Demand
the price elasticity of demand is how much the price change affects the demand
price elasticity of demand = % change in quantity provided / % change in price
price elasticity of demand is always negative
if the value is bigger than 1, the product is price elastic
if the value is less than 1, the product is price inelastic
for price elastic products, the % change in demand is bigger than the % change in price
for price inelastic products, the % change in price is bigger than the % change in demand
Factors Affecting Price Elasticity of Demand
necessity products are price inelastic
demand will be price inelastic if consumers buy competitor products
loyal customers won’t switch even if prices go up, making it less price elastic
the internet makes it easier to find alternative products, therefore increasing price elasticity
product types tend to be price inelastic whereas individual brands are often price elastic
products costing a greater proportion of consumer income will be price elastic
a product that consumers buy regularly is likely to be price inelastic
price would be more elastic if competitors were to enter the market and offer alternative products
increase in brand awareness increases customer loyalty, making the product less price elastic
Demand Curve for Price Elasticity
a product that is price elastic has a shallow demand curve
this shows that the demand is very dependent on price
a small change in price leads to a large change in demand
a product that is price inelastic has a steep demand curve
this shows that the product is not very dependent on price
a large change in price doesn’t lead to a large change in demand
Price Elasticity of Demand and Revenue
sales revenue = selling price x sales volume
if a product is price elastic, a price increase will decrease sales revenue
the money lost from the % decrease in sales will be more than the money gained from the % increase in price
for price elastic products, a firm can increase sales revenue by reducing price
if a product is price inelastic, a price increase will also increase sales revenue
the money lost from the % decrease in sales will be less than the money gained from the % increase in price
if a product is price inelastic, decreasing the price will increase sales slightly, but make sales revenue decrease because the price has fallen
Income Elasticity of Demand
a person’s income can change for reasons including: a change in jobs, a promotion, getting a pay rise or being dismissed
the average income of a nation will increase during economic growth and decrease during economic decline
income elasticity of demand shows how the demand for a product changes as income changes
income elasticity of demand = % in quantity demanded / % change in income
the income elasticity of demand depends if a product is a normal product or an inferior product
normal products have a positive income elasticity of demand whereas inferior products have a negative income elasticity of demand
necessity products have a positive income elasticity of demand which is less than 1, meaning that as income rises, demand rises: but at a slower rate than income increase
luxury products have a positive income elasticity of demand which is more than 1, meaning that demand increases at a faster rate than the increase in income
inferior products are cheaper value products: often own-brand alternatives and they have a negative income elasticity of demand, meaning that demand falls as income rises and that demand rises as income falls
How Elasticity Helps Business Decisions
elasticity helps a business to decide whether to raise or decrease the price of a product
they can predict what happens to sales, and therefore also what will happen to sales revenue
if a product is price elastic, businesses are more likely to set low and competitive prices to increase revenue
if a product is price inelastic, businesses are likely to set high prices and price skimming to increase revenue
income elasticity helps a business see what will happen to sales if economy grows or shrinks
businesses that sell a range of products may decide to promote different products if incomes decrease or increase
companies may choose to promote negative income elasticity of demand products in times of low income
companies may choose to promote positive income elasticity of demand products in times of high income
