1.2 - The Market

Question 1

Define demand

Answer 1

Demand for a product is the quantity of a product that a customer is willing and able to buy at a given price

Question 2

What are substitute products

Answer 2

Similar products which customers may buy as an alternative

Question 3

What are complementary products

Answer 3

They are in joint demand with the product. High demand for one means high demand for the other.

Question 4

Movement along the demand curve is caused by …

Answer 4

A change in price.

Question 5

A shift of the demand curve is caused by …

Answer 5

Other non price factors, such as:

• change in customer income
• changes in price of competitors
• level of advertising
• external shocks

Question 6

The gradient for a demand curve is

Answer 6

Negative

Question 7

Define Supply

Answer 7

The quantity of goods or services that firms are willing and able to sell at a given price

Question 8

(Supply) At higher prices, firms will

Answer 8

Increase their output because it will lead to higher profits

Question 9

A movement along the supply curve is caused by

Answer 9

A change in price.

Question 10

A shift in the supply curve is caused by

Answer 10

Any non price factor e.g. New tech, production costs, changed in indirect tax, government subsidies

Question 11

What is the equilibrium price

Answer 11

Where the supply and demand curves intersect

Question 12

What is a shortage

Answer 12

A situation where there is more quantity demanded than the quantity supplied at a fixed price. Sellers see this as an opportunity to raise prices to reach the equilibrium price level

Question 13

What is a surplus

Answer 13

This is a situation where there is more quantity supplied than the quantity demanded at a fixed price. Sellers will have to lower their prices to be able to sell their products they have

Question 14

What is price elasticity

Answer 14

The extent to which changes in price affect demand ( how responsive demand is to a change in price )

Question 15

Price Elasticity of Demand =

Answer 15

%Change in QD ➗% Change in Price

Question 16

If the PED is between 0-1

Answer 16

It is inelastic demand, the gradient is steep

Question 17

If the PED is between 1-infinite

Answer 17

Elastic demand, the gradient is flat

Question 18

What is revenue

Answer 18

The income received by a business from selling goods and services over a period of time.

= Price X quantity

Question 19

Factors affecting PED

Answer 19

• Number of substitutes available
• the strength of the brand
• the level of necessity or addiction
• proportion of income spent on a product

Question 20

What is income elasticity

Answer 20

It measures the responsiveness of quantity demanded to changes in real income

Question 21

YED=

Answer 21

%change in quantity demanded ➗ %change in income

Question 22

Real disposable income :

Answer 22

The income of households after taxes and benefits.

Question 23

What are normal goods

Answer 23

They have a positive but low YED, between 0 and 1, these are said to be income inelastic

Question 24

What are luxury goods

Answer 24

Have a much stronger PED, greater than 1, these are said to be income elastic

Question 25

What are inferior goods

Answer 25

Have a negative YED, as income rises, demand falls as people can afford to switch to alternatives.