1.2

Question 1

What is demand?

Answer 1

The amount of a product that consumers are willing and able to purchase at a given price. It affects the attractiveness of a market and the potential for sales.

Question 2

What factors affect demand?

Answer 2

> Price of substitute products
Price of complementary products
Changes in consumer incomes
Fashion, tastes and preferences
advertising and branding
Demographics
External shocks
seasonality

Question 3

What is supply?

Answer 3

The amount of a product that suppliers will offer to the market at a given price. The higher the price of a particular good or service the more that will be offered to the market.

Question 4

What factors affect supply?

Answer 4

> Introduction of new technology making production process more efficient.
Changes in the cost of production, such as wages and raw materials.
External shocks
Indirect taxes
Government subsidies

Question 5

What happens in the change of markets?

Answer 5

The price in a market is set where the wishes of consumers are matched exactly with those of producers.

Question 6

What happens with changes in demand?

Answer 6

If demand increases, then prices will rise.

Question 7

What happens with changes in supply?

Answer 7

If supply increases then prices will fall due to excess supply.

Question 8

What is Price elasticity of demand?

Answer 8

-PED
-The responsiveness of quantity demanded in price.

Question 9

What is the impact of PED?

Answer 9

-For some goods, a price change will result in a larger percentage change in the quantity demanded and for others a smaller percentage change in quantity demanded.

Question 10

How do you calculate PED?

Answer 10

%Change in quantity demanded
———————————————
%Change in price

Question 11

What happens when there is a price increase and you are price elastic?

Answer 11

-Leads to a bigger percentage decrease in quantity demanded. Revenues fall.

Question 12

What happens when you are price elastic and there is a decrease?

Answer 12

-Leads to a bigger percentage increase in quantity demanded. Revenues rise.

Question 13

What happens when you are price inelastic and prices increase?

Answer 13

Leads to a smaller percentage decrease in quantity demanded. Revenues rise.

Question 14

What happens when you are price inelastic and there is a price decrease?

Answer 14

Leads to a smaller percentage increase in quantity demanded. Revenues fall.

Question 15

What impact does PED have on decision making?

Answer 15

-Price inelastic: A business may be able to raise prices to increase revenue because of a smaller percentage change in quantity demanded.

-Price elastic: A business will have to think very carefully about any changes it makes to its pricing strategy.

Question 16

What factors influence PED?

Answer 16

-Number of substitutes
-Relative efforts
-Extent to which the product is labelled a necessity
-Perceived value of the brand

Question 17

What is income elasticity of demand?

Answer 17

-YED
-The responsiveness of demand to a change in income.

Question 18

What are the two types of demand?

Answer 18

-Income elastic demand
-Income inelastic demand

Question 19

What is income elastic demand?

Answer 19

Where a % change in incomes would lead to a proportionate or greater % change in the quantity demanded.

Question 20

What is income inelastic demand?

Answer 20

where a % change in incomes will lead to a proportionately lower change in the quantity demanded.

Question 21

What is the calculation for YED?

Answer 21

%Change in quantity demanded
———————————————
%Change in income

Question 22

What impact does YED have on decision making?

Answer 22

Businesses that sell goods with high income elasticity will be affected by the cyclical nature of the economy.

Businesses that sell goods with income inelastic demand are likely to find demand, and therefore, sales are more stable during economic shifts.

Question 23

What factors influence YED?

Answer 23

-Whether the product is considered a necessity
-whether the product is considered a luxury.
-the price relative to peoples incomes