1.2

Question 1

Define demand

Answer 1

The quantity of a good that consumers are willing and able to purchase at a given price at a given time.

Question 2

Define a substitute product
Define a complement product

Answer 2

A similar, rival prooduct that consumers may choose instead
A product whose use accompnies another

Question 3

List 6 factors that will affect Demand for a product

Answer 3

Price= Increase price, decreases demmand.
Taste (chnages)
Income
Substitute prices
Complementary prices

Question 4

Define supply

Answer 4

The quantity of product or service a business are willing and able to supply at a particular point of time

Question 5

List 4 factors that will affect supply of a product

Answer 5

Changes in costs of production
Introduction of new tech
Indirect taxes (taxes the gov imposes on goods and services)
External shocks (unexpected events such as poor harvests that cause an increase in price of an item)

Celt
Cost of production
External shocks
Legislation
Tech

Question 6

Define PED (price elasticity of demand)

Answer 6

A measure of the responsiveness of demand for a product to a change in price (what happens if a business changes it’s selling price)

Question 7

How do you calculate PED

Answer 7

%change in demand/ %change in price

Question 8

Defind YED (income elasity of demand)

Answer 8

Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income.

Question 9

How do you calculate YED

Answer 9

%change in demand/ %change in real income

Question 10

What goes on the Y axis of a demand curve graph

Answer 10

Price level

Question 11

What goes on the X axis of a demand curve graph

Answer 11

Quantity

Question 12

Define excess demand and excess supply

Answer 12

ED- Too much demand in relation to supply leads to a shortage
ES- Supply is greater than demand leads to a surplus

Question 13

Define subsidies

Answer 13

A payment from the Government to aim to encourage production, boost exports, promote research, prevent a business from collapsing, or reduce unemployment. They are also introduced to make the price of a product more affordable to consumers.

Question 14

What does a steep demand curve indicate a product is?

Answer 14

Price inelastic thus demand for the product is not responsive to a change in price.

Question 15

What does a shallow demand curve indicate a product is?

Answer 15

Price elastic thus demand is responsive to a change in price.

Question 16

What factors usually make a product inelastic?

Answer 16

Few substitutes, are necessities, and/or are addictive.

Question 17

What are factors that influence PED?

Answer 17

Availablility of substitutes
Frequency of the purchase
Relative price/expense of a product
Whether the price is a necessity or luxury
Time (short run price changes have less effect than in the long run)
Brand strength

Question 18

What pricing strategies are likely when a product is elastic or inelastic?

Answer 18

Elastic - Lowering pricing policies (competitive pricing)
Inelastic - Setting high prices (skimming)

Question 19

Define unitary price elasticity

Answer 19

The value of PED = 1 and so change in demand = change in price

Question 20

Define infinite/perfect elasticity

Answer 20

Extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all. In both cases, the supply and the demand curve are horizontal. (% change in price must =0)

Question 21

Define an elastic product

Answer 21

Whole numbers. These products will have a significant change in demand for a product when the price is changed. Elastic products have substitutes.
Examples- Heinz soup, Daily Mail

Question 22

Define inelastic product

Answer 22

A change in price causes a smaller percentage change in demand
Examples-
Petrol, Tap water, Cigarettes, Apple products

Question 23

What does it mean if a products YED is greater than +1

Answer 23

Product is income elastic so sensitive to price changes in income hence luxury goods

Question 24

What does it mean if YED is greater than 0 but less than 1

Answer 24

Product is income inelastic as incomes rise the product will see a small shift in demand hence necessity goods

Question 25

What does it mean if the YED is less than 0

Answer 25

As income rise, demand shifts down for product thus making it an inferior good.

Question 26

disadvantages of YED

Answer 26

Not all consumers are the same and have the same level of incomes therefore YED will change for different consumers’ income individually; as a result unless the target audience as a collective experience a change in income it might prove to be an ineffective measure.

Question 27

Why do businesses need to know YED 3 reasons

Answer 27

Estimate sales- predict sales revenue
Develop a pricing policy- Knowing YED helps the firm decide whether to raise of lower price following a change in consumer incomes. If incomes are falling and YED is positive, a reduction in price might help cmpensate for the reduction in demand.
Diversification-
Firms can diversify and offer a range of goods with different YEDs to spread the risks associated with changes in the level of national income.

Question 28

YED impact on business decisions

Answer 28

Businesses that sell goods with high income elasticity will be affected by the cyclical nature of the economy
In a recession, demand will fall significantly for products that have a high income elasticity
Businesses selling goods that have income inelastic demand are likely to find demand, and therefore sales, more stable during economic shifts
Regardless of whether a businesses goods are elastic or inelastic it should use economic factors to elp plan for changes in production. For example, a supermarket stocking luxury products with a high YED may switch to value brand with a lower YED or even inferior goods.