OCR Economics - Markets in action demand & supply determinants, efficiency & elasticities

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Economics 2011
DEMAND
Demand: the quantity of a product that consumers are able and willing to purchase at
various prices over a period of time
Market: where or when buyers and sellers meet to trade or exchange products.
It is important to remember that a want and demand are entirely different what
consumer's want they may not actually purchase.
Notional Demand: The desire for a product
Effective Demand: The willingness and ability to buy a product
The definition of demand assumes that the only factor affecting demand is price,
economists refer to this as ceteris paribus
Ceteris Paribus: Assuming other variables remain unchanged
The relationship between demand and quantity is INVERSE
CONSUMER SURPLUS:
In every market there are always people who are willing to pay above what they actually
pay.
Consumer Surplus: the extra amount that a consumer is willing to pay for a product above
the price that is actually paid!
Diagram:
The determinants of Demand
Consumer Income
Real disposable Income: income after taxes on income have been deducted, state
benefits have been and added AND the result is adjusted to account for changes in
prices!
For Example:
If the money I receive from my job increases by 5% but prices also increase by 3% then my
real income only increases by 2%
Therefore if consumer income increases then so does demand but if it falls demand falls
because they lose the ability to pay for the good.
Normal Goods: goods for which an increase in income leads to an increase in demand,
they also have a positive income elasticity of demand.

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Economics 2011
Inferior Goods: goods for which an increase in income leads to a fall in demand
It is difficult to generalise with inferior goods because it is different for different people.…read more

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Economics 2011
Diagram:
Determinants of Supply:
Costs of Production:
These would increase if a company had to pay more for labour or for certain natural
resources. Banks cut cost by replacing labour with machines
Size & nature of the industry:
In a competitive industry minor increases in costs can have a big effect on supply. In a
more inelastic market, the cost can be passed onto the consumer without it having a
great effect.…read more

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Economics 2011
Disequilibrium Price: Any position in the market where demand and supply aren't equal
In practice markets are very unstable and operate in disequilibrium, this is when we get
excess demand/ supply
Surplus: an excess of supply over demand
For example the supplier feels that their product can be sold at £400 and at this price they
will supply 1140 holidays but then consumers only buy 650 of those because the price is
high, there is too much SUPPLY therefore the operator has to…read more

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Economics 2011
Elasticity's!
Elasticity: the extent to which buyers and sellers respond to a change in market
conditions
They basically measure how much demand and supply changes when the factors
affecting them are involved
Price Elasticity of Demand: the responsiveness of a change in the quantity demanded to
a change in the price of a product
PED = % change in QD/% change in price
Price Elastic: where the percentage change in quantity demanded is highly sensitive to a
change in price
Price Inelastic: where…read more

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Economics 2011
XED = % change in QD of product A /% change in price of product B
+ is a Substitute!
- Is a Compliment!
0 means there isn't a particular relationship
Price Elasticity of Supply
The responsiveness of quantity supplied to a change in the price of the product
PES = % change in QS / % change in Price
If PES is elastic then a small change in price will have a big effect on the quantity
supplied!
Determinants of PES:
Availability…read more

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Economics 2011
Peak time tends to be more inelastic because those purchasing tickets to London tend to
have to be there before 10:30.
They use business to maximise revenue, elasticity estimates allow them to see how best
to maximise their revenue.
YED:
In most economies real disposable incomes rise over time, this is good news for products
that have a highly positive YED because demand rises as incomes do. This tends to mean
that products with a negative YED will do badly.…read more

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