1.2 - The Market Flashcards
(22 cards)
Demand
The amount of a prod that consumers are willing and able to purchase at any given price
Factors leading to a change in demand
Change in price of substitutes, e.g. Pepsi and Coke
Price of compliments
Change in consumer income
Fashions
Advertising and branding
Demographics
External shocks (factors beyond control of b)
Seasonality
Supply
The amount of a product which suppliers will offer to the market at a given price
Fixed supply
When there is a limit to supply, price irrelevant
Factors leading to a change in supply
- Change in cost of production
- Availability of resouces
- Intro of new tech
- Indirect tax
- Gov subsidies
- External shock
- BoE —> interest rates
Excess demand
Position where demand is greater than supply, shortages
Excess supply
Supply greater, unsold good
What is equilibrium also known as?
Market clearing price
Disequilibrium
Where the price in the market is not set at the point where supply and demand are equal
PED
How responsive a prods demand is to a change in price. Helps set right pricing. ALWAYS NEGATIVE!
Price elastic product
- Greater than 1
- More response to change in price
- Price fall, demand increase. Price rise demand fall rapidly
Price inelastic product
- Little response to change in price
- Result less than 1
- Price decrease rev decrease, price increase rev increase
PED formula
% Change in QD / % Change in Price
Factors influencing PED
How easy it is to get substitutes:
- Time —> more efficient cars if petrol price go up long term
- Comp for same prod
- Branding —> stronger = more inelastic
YED
How responsive demand is to a change in income
Income elastic product
- Greater than 1
- If income increases and demand increases more
- Luxury goods and discretionary expenditure (non-essential spending NOT AUTOMATIC) —> holidays, entertainment
Income inelastic product
- Less than 1
- If income increases and demand increases a smaller amount
- Essential such as milk, food, heating
Why do you pay attention to the negative sign in the YED value?
- Tells you whether it is a normal good or inferior good
- Where there is a decrease in demand there is a negative result for inferior goods
YED formula
% Change in QD / % Change in Income
Factors affecting YED
Depends on type of goods. For example price —> low price often inelastic
What happens to inelastic products when income increases?
Normal - demand increases
Inferior - demand decrease
What happens to elastic products when income increases?
Normal - demand increases Inferior - demand decrease
