Flashcards in 1.2 The Market Deck (46)
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1
What is demand
the level of interest customers have in a product
2
How does price effect demand
-higher the price the lower effective demand (due to fewer customers wanting to pay high price)
-lower prices can affect demand as it may damage consumer perception of quality
3
What is a subsitute product
similar, rival product that consumers may choose instead
4
What is a complement product
a product whose use accompanies another, so petrol is a complementary product to cars
5
Explain the relationship between demand for a product and the price of its complements
-if price of complementary product rises- demand for original product falls
-e.g if price of petrol falls- demand for cars increases
6
How does change in consumer incomes affect demand
-what happens if income levels rise what happens to demand
-what happens when economies go through recession
-when do inferior goods see demand rise
-when do inferior goods fall in demand
-if income levels rise demand for normal goods rise- consumers have more income to spend
-however when economies go through recession- incomes fall- normal and luxury goods demand falls- consumers try to save money
-inferior goods see demand rise when incomes fall- to save money (e.g poundland)
-when incomes rise again consumers switch back to normal, luxury goods- fall in demand for inferior goods
7
Name 5 factors that affect demand- positively and negatively
-tastes and preferences- unpredictable changes- can positively and negatively affect demand
-advertising- lead to major short-term increase in demand
-demographics- changes in population- affect demand for individual products
-external shocks- (natural disasters, global pandemic) - hugely impact demand- unpredictable
-seasonality- affects demand (e.g weather- strawberries, XMAS)
8
How does supply have an effect on the profit a company makes
-the more a firm supplies, the more profit they will make
9
How does cost of production of a product affect supply
-if production costs rise, amount supplied will fall
-if production costs fall, amount supplied will rise
10
How does the introduction of technology within a business affect supply
-introduction of technology will lead to an increase in supply as
- lower production costs
-which offer higher profits
11
How does indirect taxes affect supply
-increase in indirect tax- increases costs- reduces supply
-decrease in indirect tax- cuts total costs- increases supply
12
What are indirect taxes
-taxes the government imposes on goods and service (VAT)
13
How do government subsidies affect supply
-cuts cost of production- subsidies increase supply
14
What are government subsidies
-opposite to tax
-occur when government wants to increase supply of a product (wind-powered energy)
-so offers subsidies to business
15
How do external shocks affect supply
-natural disasters reduce total quantity of item avaliable- price of item increases- production costs rise- reducing amount they are willing to supply
16
What happens if demand is higher than supply
-price of product will rise
-until demand falls abck to level of supply
17
What happens if supply is higher than demand
-price will fall
-stimulating more demand so product is sold
18
What is equilibrium in business
situation in a market where supply and demand are balanced- so price is stable
19
What are commodity markets
-markets for undifferentiated products
-e.g. raw materials
20
How can you work out equilibrium on a supply and demand graph
-equilibrium is where the supply line and demand line cross
21
What will occur to the demand curve if the price goes up
-demand curve moves to the right (rises)
22
What will occur to the demand curve if the price goes down
-demand curve moves to the left (falls)
23
What will occur to the supply curve if the price goes up
-supply curve moves to the left (falls)
24
What will occur to the supply curve if the price goes down
-supply curve moves to the right (rises)
25
What is price elasticity of demand
measures responsiveness of demand for a product to change its price
26
What is the formula for price elasticity of demand
% change in quantity demanded/ % change in price
27
what occurs if the product is price elastic and the price increases
-price increases
-revenue falls
-as small increase in price leads to fall in demand
28
what occurs if the product is price elastic and the price decrease
-effect on revenue
-explain
-revenue increases
-as small cut in price leads to large increase in demand
29
what occurs if the product is price inelastic and the price increases
-effect on revenue
-explain
-increases revenue
-as an increase in price leads to a small fall in demand
30
what occurs if the product is price inelastic and the price decreases
-effect on revenue
-explain
-revenue falls
-as price cut causes small increase in demand
31
What does it mean if price elasticity is between 0 and -1
product price is inelastic
so changes in price have smaller effect on demand/ sales
32
What does it mean if price elasticity is a negative number greater than 1
product is price elastic
changes in price have larger effect on demand/ sales
33
name 3 factors that influence price elasticity
-degree of product differentiation
-availability of direct substitutes
-branding and brand loyalty
34
Name 2 significant reasons of price elasticity
-help in forecasting sales- by considering impact of planned future price changes
-can help to decide on the best pricing strategy for increasing revenue
35
Name 2 reasons why price elasticity values change over time
-competitive markets firms affect extent products stand out from rivals
-unpredictability- undermine usefulness of price elasticity - hard to rlly know current price elasticity until after price has been changed and the effect on demand measured
36
how do you calculate income elasticity of demand
% change in demand/ % change in real incomes
37
Do inferior goods have a positive/ negative income elasticity
negative income elasticity
38
Do normal goods have a positive/ negative income elasticity
positive income elasticity
39
Do luxury goods have a positive/ negative income elasticity
positive income elasticity
40
What happens to inferior goods if
-changes in real income increase
-changes in real income decrease
-if real incomes increase- demand decreases- consumers stop buying cheaper goods- have more money
-if real incomes decrease- demand increases- consumers switch to these products to save money as their incomes fall
41
What happens to normal goods if
-changes in real income increases
-changes in real income decreases
-if real income increases- demand increases at same rate- affluent customers able to buy more of this product now
-if real income decreases- decrease at same rate- if consumers tighten their belts- cut back on these products
42
What happens to luxury goods if
-changes in real income increases
-changes in real income decreases
-if real income increases- increase at faster rate than real incomes- extra income will be spent on these products
-if real incomes decrease at a faster rate than real incomes- first products to disappear from customers shopping baskets when they feel they need to tighten their belts
43
Name the 2 factors that affect income elasticity
-indulgences- things we treat ourselves with when we can afford it-more sensitive t changes in income
-necessities- basic items we always expect to buy
44
Name 3 significant factors of income elasticity
-sales forecasting- knowledge of reaction of product to change in real incomes allows business to forecast sales
-financial planning- sales forecasts can be factored into budgets and financial plans- prevents supplying too much/ little of a product
-product portfolio management- ensure product portfolios contain products with a range of income elasticities- to prevent critical impact on sales if changes in real income occur
45
What does it mean if a product is price elastic
product = elastic if price change causes change in demand/ supply
46
