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Flashcards in B5-Market Influence on Business Strategies Deck (15)
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1
Q

Market Influence on Business Strategies

  • Demand Curve*
  • Quantity Demand*
A

Demand Curve

The demand curve illustrates the maximum quantity of a good that consumers are willing and able to purchase at each and every price (at a given price), all else being equal. Note that the demand curve is similar to the aggregate demand curve, except that the x-axis here is quantity and not real GDP

Quantity Demanded

Is defined as the quantity of a good (or service) individuals are willing and able to purchase at each and every (given) price, all else being equal.

2
Q

Market Influence on Business Strategies

Fundamental Law of Demand

Reasons Price and Qty Demand Inversely related

  • Substitution Effect*
  • Income Effect*
A

Fundamental Law of Demand

States that the price of a product (or service) and the quantity demanded of that product are inversely related.

Reasons Price Price and Qty Demanded are inversely related

1. Substitution Effect

fact that consumers purchase more (less) of a good when its price falls (rises) in relation to the price of other goods.

  1. Income Effect

as prices are lowered with income remaining constant, people will purchase more of all lower-priced products.

3
Q

Market Influence on Business Strategies

Factors that Shift Demand Curve

(WRITEN)

A
  1. Changes in Wealth
  2. Changes in the prices of Related goods
    • Compliments-if pc $ falls, demand for peripherals increases
    • Substitutes-if the price of a similar good increases (subsitute), the demand for the original good will shift to the right.
  3. Changes in Consumer Income
  4. Changes in Consumer Tastes or Preferences for a Product
  5. Changes in Consumer Expectations
  6. Changes in the Number of buyers served by the Market
4
Q

Market Influence on Business Strategies

Fundamental Law of Supply

A

The fundamental law of supply states that price and quantity supplied are positively related.

5
Q

Market Influence on Business Strategies

Factors that shift Supply Curve

A
  1. Changes in Price Expectations of the Supplying Firm
    • If $ are expected to decrease, the firm will supply more now at each price level to take advantage of the currently higher prices
  2. Changes in Production Costs
    • Changes in the prices of inputs (minimum wage increases-supply decreases
  3. Changes in the Price or Demand for Other Goods
    • a dec (inc) in the demand for another good supplied by a firm would cause the firm to shift its resources and increase(dec) the supply of its remaining goods.
  4. Changes in Subsidies or Taxes
    • a dec in taxes or inc in subsidies would inc the amount supplied at each price leve.
  5. Changes in Production Technology
    • an improvement in technology would cause a shift to the right of the supply curve.
6
Q

Market Influence on Business Strategies

Market Equilibrium

A

A market is in equilibrium when there are no forces acting to change the current price/quantity combination. The market supplies just as much as is demanded and there is no pressure to change prices.

  1. The market’s equilibrium price and output (quantity) is the point where the supply and demand curves intersect. This is sometimes called the market clearing price.
7
Q

Market Influence on Business Strategies

Market Equilibrium

Price Floor

Surplus or Shortage?

A

Results in Surplus

If the price is set above the equilibrium price, the quantity demanded will be less than the quantity supplied, and a surplus will result.

A price floor is a minimum price set above the equilibrium price, which causes surpluses to develop. Price floors are minimums prices established by law, such as minimum wages and agricultural price supports.

8
Q

Market Influence on Business Strategies

Market Equilibrium

Price Ceiling

Surplus or Shortage?

A

Results in Shortage

if the price is set below the equilibrium price, the quantity demanded will exceed the quantity supplied and a shortage will result.

A price ceiling in a maximum prices that is established below the equilibrium price, which causes shortages to develop, Price ceilings cause prices to be articficially low, creating a greater demand than the supply available.

9
Q

Market Influence on Business Strategies

Market Equilibrium

Effects of Changes in Demand And Supply on Equilibrium

A

Change in Demand__Change in Supply Eff on Equil Qty Eff on Equilib Qty

  • Increase Increase Increase Indeterminate*
  • Increase Decrease Indeterminate Increase*
  • Decrease Decrease Decrease Indeterminate*
  • Decrease Increase Indeterminate Decrease*
10
Q

Market Influence on Business Strategies

Elasticity of Demand and Supply

Price Elasticity of Demand

A

The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

Ep = % change in quantity demanded

% change in price

Any number less than 1 is inelastic and any number greater than 1 is elastic.

11
Q

Market Influence on Business Strategies

Elasticity of Demand and Supply

A
12
Q

Market Influence on Business Strategies

Elasticity of Demand and Supply

Price Inelasticity

A

absolute price is < 1.0

13
Q

Market Influence on Business Strategies

Elasticity of Demand and Supply

Factors Affecting Price Elasticity of Demand

A
  1. Product demand is more elastic with more substitutes available but is inelastic if few substitues are available. (Demand for soft drinks and fast food restaurant meals are price elastic. Purveyors of those products must be careful in raising their prices
  2. The longer teh time period, the more product demand becomes elastic b/c more choices are available.
14
Q

Market Influence on Business Strategies

Elasticity of Demand and Supply

Unit Elasticity

A

absolute price elasticity of demand = 1.0

15
Q

Market Influence on Business Strategies

Elasticity of Demand and Supply

Price Elasticity Effects on Revenue

A