1.2 The Market

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  • Created by: AmyBennet
  • Created on: 29-03-17 20:31
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  • 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
    • 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
    • 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
    • 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
      • 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
    • 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
        • 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
      • 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

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