Need to memorise

Question 1

Demand Shifters

(5/2,2,2,1,1)

Answer 1

Income:

Normal Good:

• Demand increases as consumer income increases.

Inferior Good:

• Demand decreases as consumer income increases.

Prices of Related Goods:

Substitute Goods:

• Demand increases as the price of a substitute rises.

Complement Goods:

• Demand decreases as the price of a complement rises.

Advertising and Consumer Tastes:

Informative Advertising:

• Provides information about a product, increasing demand.

Persuasive Advertising:

• Alters consumer tastes, increasing demand.

Population:

• More consumers increase demand.

Consumer Expectations:

• Expectations of future prices or income can affect current demand.

Question 2

Consumer Surplus

Marketing strategies – like _______ __________ and _______ _____________ – rely on understanding ___________ _______ for products.

Total consumer value definition?
Total expenditure definition?
Consumer surplus definition?
How to calculate?

Answer 2

Marketing strategies – like value pricing and price discrimination – rely on understanding consumer value for products.

Total consumer value definition

• the sum of the maximum amount a consumer is willing to pay at different quantities.

Total expenditure

• the per-unit market price times the number of units consumed.

Consumer Surplus Definition:

• The extra value that consumers derive from a good but do not pay for.

Calculation:

• The difference between what consumers are willing to pay and what they actually pay.

Question 3

Supply Shifters (7)

Answer 3

Input Prices:

• Higher input prices decrease supply.

Technology:

• Improvements increase supply.

Government Regulation:

• Can either increase or decrease supply.

Number of Firms:

• More firms increase supply.

Substitutes in Production:

• Higher prices of substitutes decrease supply.

Taxes:

• Higher taxes decrease supply.

External Factors:

• Events like war, weather, and natural disasters can affect supply.

Question 4

Factors Affecting Own Price Elasticity (3/1,3,2)

Answer 4

1. Availability of consumption substitutes:

• The more substitutes available for the good, the more elastic the demand for it.

2. Time/Duration of purchase horizon:

• Demand tends to be more inelastic in the short term than in the long time.
• The more time consumers have to react to a price change, the more elastic the demand for the good.
• Time allows the consumers to seek out available substitutes.

3. Expenditure share of consumers’ budgets :

• Essential goods are generally inelastic.
• Nonessential goods are generally elastic.