1.2 The Market

Question 1

Define Adding Value

Answer 1

Adding value = the difference between the price of the finished product/ service and the cost of the inputs involved in making it - adding special unique features to a product to help increase its selling price

Question 2

4 Ways to add value:

Answer 2

1. Build a brand
2. Deliver excellent customer service
3. Add product features and benefit customers wants
4. Operate efficiently

Question 3

Benefits of adding value

Answer 3

-Charge a higher price
-Creates a point of difference with competitors
-Protection against competitors offering lower prices
-Focuses business on its target market segment

Question 4

What is Demand?

Answer 4

Demand for a good or service is the quantity that customers are willing and able to buy at a given price in a given period of time

Question 5

What is the basic law of demand?

Answer 5

The basic law of demand is that demand varies inversely with price - lower prices make products more affordable for customers

Question 6

Causes of changes in demand

Answer 6

-Incomes & price
-Fashions, tastes & preferences
-Advertising and branding
-External shocks
-Seasonal factors
-Demographics

Question 7

Decrease in price=

Answer 7

Increases quantity demanded

Question 8

Increase in price =

Answer 8

Fall in quantity demanded.

Question 9

What is a luxury good?

Answer 9

A good which is non-essential, and is very responsive to change in income; an increase in income would cause a large increase in demand

Question 10

What is a normal good/ necessity?

Answer 10

A good which is essential, demand less responsive to a change in price.

Question 11

What is an inferior good?

Answer 11

A good which has an inverse relationship with income; as income rises, demand falls and vice versa e.g supermarket own brands

Question 12

What is supply?

Answer 12

Supply is the quantity of a good or service that a producer is willing and able to supply

Question 13

What is the basic law of supply?

Answer 13

As the price of a product rises, businesses expand to supply the market

Question 14

Main causes of changes in supply

Answer 14

-Cost of production
-External shocks
-New technology
-Taxation & subsidies

Question 15

What does a low unit cost mean?

Answer 15

A business can supply more at each price - e.g through higher productivity

Question 16

What does a high unit cost mean?

Answer 16

Cause an inward shift of supply e.g rise in wage rates or an increase in energy prices/ other raw materials

Question 17

What is a subsidy?

Answer 17

A subsidy is any form of government support - financial or otherwise- offered to producers and (occasionally) consumers

Question 18

What is Market Equilibrium?

Answer 18

Balance between market demand and market supply

Question 19

Define Price Elasticity of Demand

Answer 19

Price elasticity of demand measures the extent to which the quantity of a product demanded is affected by a change in price

Question 20

Equation for price elasticity of demand

Answer 20

PED = %change in quantity demands/
%change in price

Question 21

Interpreting Price Elasticity of Demand:
Price elastic

Answer 21

More than 1 = Change in demand is more than change in price

Question 22

Interpreting Price Elasticity of Demand:
Price inelastic

Answer 22

Less than 1 = Change in demand is less than a change in price

Question 23

Interpreting Price Elasticity of Demand:
Unitary price elasticity

Answer 23

Exactly 1 = change in demand = change in price

Question 24

What value does a price elastic good have?

Answer 24

More than 1

Question 25

What value does a price inelastic good have?

Answer 25

Less than 1

Question 26

What value will a unitary price elastic good have?

Answer 26

Exactly 1

Question 27

How will a decrease and increase in price of a price elastic good effect revenue?

Answer 27

Reduction in price = increased sales revenue Increase in price = decreases sales revenue

Question 28

Factors influencing PED

Answer 28

-Brand strength -Competition -Availability of substitutes -Necessity

Question 29

How does brand strength effect PED?

Answer 29

Products with strong brand and reputation tend to be more price inelastic people buy no matter the price.

Question 30

Necessity - effect on PED

Answer 30

The more necessary a product, the more demand tends to be inelastic as people buy no matter the price.

Question 31

Availability of substitutes - Effect on PED

Answer 31

Demand for products that have los of alternatives (substitutes) tends to be price elastic

Question 32

Define income elasticity of demand (YED)

Answer 32

Income elasticity of demand measures the extent to which the quantity of a product demanded is affected by a change in income

Question 33

Equation for income elasticity of demand (YED)

Answer 33

YED = %change in quantity demanded/ %change in income

Question 34

Luxuries good effect on YED

Answer 34

-Income elasticity more than 1 -As income grows more is spent on luxuries, as income falls less is spent on luxuries.

Question 35

Necessities effect on YED?

Answer 35

-Less than 1 but more than 0 -As income grows less is spent on necessities

Question 36

What happens when income rises on inferior goods?

Answer 36

For inferior goods as income rises demand falls because consumers switch to better alternatives, substitute products become affordable

Question 37

For inferior goods as income falls what happens to demand?

Answer 37

For inferior goods, as income falls demand increases

Question 38

Limitations of calculating & using elasticities:

Answer 38

-Difficult to get reliable data -Other factors affect demand e.g consumer tastes -Many markets subject to rapid technological change - previous data less reliable -Competitors will react

Question 39

How can a company make demand more price inelastic?

Answer 39

Building strong brands and product USPs

Question 40

Factor influencing YED?

Answer 40

-Stage in economic cycle eg recession and boom -Minimum wage, legislation, taxes -Nature of the good

Question 41

What can understanding YED help a business to do?

Answer 41

Helps a business plan their production and produces helping them generate higher profits and have less exposure to downturns in the economy.

Question 42

What pricing strategies are best used for products that are price elastic?

Answer 42

Price skimming

Question 43

What pricing strategies are best used for products that are price inelastic?

Answer 43

Competitive pricing