1.2 The Market
- Created by: AmyBennet
- Created on: 29-03-17 20:31
View mindmap
- 1.2 The Market
- 1.2.1 Demand
- Factors leading to a change in demand
- Prices of substitutes
- As the price of substitutes increase, so does the demand for a product
- Prices of complementary goods
- As the price of complementary goods increases, the demand for a product decreases
- Changes in consumer incomes
- As income, increases, so does demand for a certain product
- Fashions, tastes, and preferences
- Advertising and branding
- Demographics
- As the distributions of the population changes, so does the demand for certain products
- External shocks
- Factors beyond the control of the business (competition, government, economic climate, social and environmental factors)
- Seasonality
- Some goods have seasonal demand
- Prices of substitutes
- Factors leading to a change in demand
- 1.2.2 Supply
- Factors leading to a change in supply
- Changes in production costs
- As costs go up, supply goes down
- Introduction of new technology
- Indirect taxes
- As taxes go up, supply goes down
- Government subsidies
- As these go up, supply goes up
- External shocks
- Changes in production costs
- Factors leading to a change in supply
- 1.2.3 Markets
- The interaction of supply and demand
- In any market, the price is set where the wishes of the consumer are matched exactly with those of producers
- This is called the equilibrium price and it's where supply and demand are equal. Also known as market clearing price.
- If demand increases, price will rise. This is because producers want to sell more at a higher price as they have larger profit margins.
- This changes the equilibrium price
- If demand decreases the price will fall
- In any market, the price is set where the wishes of the consumer are matched exactly with those of producers
- The interaction of supply and demand
- 1.2.4 Price elasticity of demand
- PEoD is how much the demand for a product changes after the price is changed by a certain amount
- PEoD = % change in quantity demanded / % change in price
- Less than 1 = price inelastic
- Greater than 1 = price elastic
- Factors influencing PEoD
- Time
- As time increases, PEoD decreases meaning products become more inelastic
- Competition
- More competition means PEoD increases so a product is more elastic
- Branding
- More successful branding decreases PEoD which decreases price elasticity
- The proportion of income spent on a product
- Higher proportion of income means higher PEoD which means higher price elasticity
- Time
- Implications on pricing
- If a product is inelastic it means when the price is changed, demand changes by a smaller amount
- This makes it good for the business to increase prices as the demand won't decrease by a lot
- If a product is elastic it means the demand changes a lot for a small change in price
- This means the price should be decreased by a small amount so the demand increases by a large amount
- If a product is inelastic it means when the price is changed, demand changes by a smaller amount
- 1.2.5 Income elasticity of demand
- Measures the responsiveness of demand to a change in income
- IEoD = % change in quantity demanded / % change in income
- Greater than 1 = income elastic
- Less than 1 = income inelastic
- The factors influencing IEoD
- Necessities
- These are basic goods that consumers need to buy.
- Demand for these types of goods will become inelastic
- These are basic goods that consumers need to buy.
- Luxuries
- Consumers like to buy these but only if they can be afforded.
- Spending on these goods is discretionary. Demand for these goods is income inelastic
- Consumers like to buy these but only if they can be afforded.
- Necessities
- The significance of IEoD to businesses
- Businesses selling goods with high income elasticity
- The demand is cyclical, when the economy is growing, demand is high, when there is recession, demand falls
- Businesses selling goods with low income elasticity
- More stable during the different changes in the business cycle
- Production planning
- If businesses know the IEoD for their products they can respond to predicted changes in income
- Product switching
- Some manufacturers have flexible resources and can switch which goods they produce
- Businesses selling goods with high income elasticity
- 1.2.1 Demand
Comments
No comments have yet been made