1.2 Market

Question 1

What is meant by demand?

Answer 1

Demand is the amount of goods and services a consumer is willing and able to purchase at a given price and in a given time period.

Question 2

What is meant by effective demand?

Answer 2

This is demand that is backed up by an readiness to pay.

Question 3

What factors affect demand?

Answer 3

Price
Price of substitutes
Price of complementary goods
Advertising and branding
Consumer incomes
Fashions, tastes and preferences
Demographics/population
external shocks

Question 4

What is meant by a complementary good?

Answer 4

When two goods are generally purchased together. E.g. Petrol and Petrol car.

Question 5

What is meant by a substitute good?

Answer 5

When one product can be bought instead of another e.g., cornflakes and Frosties.

Question 6

What is meant by supply?

Answer 6

Supply is the amount of goods and services a supplier is willing and able to produce at a given price in a given time period.

Question 7

What factors affect supply?

Answer 7

Changes to costs of production
Introduction of new technology
Subsidies
Indirect taxes
Number of firms in the market
External shocks

Question 8

Why is the demand curve downward sloping?

Answer 8

There is an inverse relationship between price and quantity demanded.

Question 9

Why is the supply curve upward sloping?

Answer 9

There is a positive relationship between price and quantity supplied. At a higher price there is more profit incentive for the firm to produce more.

Question 10

What is meant by the market equilibrium price?

Answer 10

This is where demand and supply meet.

Question 11

What is meant by a surplus in the market?

Answer 11

Where supply exceeds demand, usually because the price is too high.

Question 12

What is meant by a shortage in the market?

Answer 12

Where demand exceeds supply, usually because of low prices.

Question 13

Which way will demand shift, if there is an increase in demand?

Answer 13

Right

Question 14

Which way will demand shift, if there is a decrease in demand?

Answer 14

Left

Question 15

Which way will supply shift if there is an increase in supply?

Answer 15

Right

Question 16

Which way will supply shift if there is a decrease in supply?

Answer 16

Left

Question 17

What is meant by Price Elasticity of Demand (PED)?

Answer 17

The responsiveness of demand to a change in price.

Question 18

How do you calculate PED?

Answer 18

Percentage change in quantity demanded/percentage change in price.

Question 19

Why is PED Always negative?

Answer 19

There is an inverse relationship between price and quantity demanded.

Question 20

What factors affect the PED?

Answer 20

Number of substitutes
Necessity or luxury
Addictiveness/habitual behavior
Frequency of purchase
Time
Percentage of income

Question 21

If PED is below 1, what does this mean?

Answer 21

PED = Inelastic

Question 22

If PED is above 1, what does this mean?

Answer 22

PED=Elastic

Question 23

What is meant by inelastic PED?

Answer 23

It means that demand is not very responsive to a change in price.

Question 24

What is meant by elastic PED?

Answer 24

Demand is very responsive to a change in price.

Question 25

If PED is elastic, how will the pricing strategy of the firm change?

Answer 25

More likely to charge a lower price -competitive pricing or penetration pricing

Question 26

If PED is inelastic, how will the pricing strategy of the firm change?

Answer 26

More likely to charge a higher price -price skimming -cost plus pricing with large mark up.

Question 27

What happens to revenue if PED is inelastic and the price rises?

Answer 27

A rise in revenue

Question 28

What happens to revenue if PED is elastic and price rises?

Answer 28

A fall in revenue

Question 29

What is meant by income elasticity of demand?

Answer 29

The responsiveness of demand to a change in income.

Question 30

How do you calculate YED?

Answer 30

Percentage change in quantity demanded/ percentage change in income.

Question 31

What factors influence the YED?

Answer 31

Luxury or necessity Expectations of changing income e.g. loss of job, economic influences

Question 32

If the YED is negative, what type of good will this be?

Answer 32

Inferior good

Question 33

If the YED is positive, what type of good will this be?

Answer 33

Normal good

Question 34

What is meant by an inferior good?

Answer 34

A good where as income increases, demand decreases and vice versa

Question 35

What is meant by a normal good?

Answer 35

A good where as income increases, demand increases and vice versa.