How businesses respond to their markets
Dynamic nature of markets
Economic systems Characteristics
Command Public sector administrators direct activity
Transition Command economy switching to mixed
Mixed A blend of private sector and public sector
Free market Mainly private sector activity
When the conditions of supply and/or demand chainge in a market, likely to lead to price changes, which influence decisions of businesses and consumers.
Scarcity and choice:
Humans needs and wants are unlimited but resources are finite, so choices must be made by consumers to prioritise things that can be afforded. However businesses choice must involve careful considerations of likely profitability of the product.Opportunity costs choosing the next best alternative over the best of a product.
A theoretical attraction of free markets is that consumers control allocation of resources by choosing what to buy due to market forces.
Changes in Demand
Effective demand is readiness and ability to pay for a product.
Determinants of demand:
- Tastes - the pattern of consumer preferences
- Substitutes - the alternative to a product available.
- Complementary goods - things used with a product e.g. Car & Petrol.
- Income - the amount of money available and its distribution.
- Population - number and distribution of people in a market.
- Price - the amount charged per unit of a product.
Demand curve is the relationship between quantity demanded and price for a product in a market. For Normal products a high price is associated with lower quantity bought and more will be sold at a low price. A rise in price will cause the demand curve to shift up and to the left, caused by increase in income.A fall in price will cause the demand curve to shift down and to the right, decreased income, explained using opportunity costs.
Changes in supply
Smaller businesses' are easily taken over by the larger businesses leaving small businesses with surpluses.
When Businesses require changes due to reduced profits and demand, overcome by adding value or competitive advantages over rivals.
Supply is a businesses quantities available at different prices. The supply curve slopes upwards from the left to right.
Changing the quality supplied:
Differentiate - make the product stand out, distinctive features or persuasive advertising.
Competitive advantage - a quality giving advantages over rivals.
Changes in price
Profitable prices attract producers to supply to a market. A rise in price is likely to attract more suppliers and output.
Supply curves show us that quantity increases as price increases. Lower prices tend to attract more buyers to a product, as the opportunity cost of the product falls. Demand curves show us more will normally be bought at a lower price than a higher price.
A combination of supply and demand curves in a competitive market sets the market price. The point at which both curves cross is the equilibrium point. Market clearing is the balance between quantity supplied and demanded.
Prices in a dynamic economy:
Whenever a price changes there has been a change in supply conditions in demand or both.
Elasticity of demand
Price elasticity of demand:
If demand is price elastic a small price change will cause larger change in quantity demanded.
Factors influencing price elasticity: Substitutes -
Substitutes will increase the price elasticity of a product. Although brands with strong customer loyalty that differentiate their product through marketing making substitutes look less attractive in comparison such as Chanel, Rolex and Ferrari retain a strong appeal to consumers making their demand relatively inelastic.
More Price Elastic Less Price Elastic
Goods with close substitutes No close alternatives e.g. petrol
Luxury goods Necessities
Longer time period Shorter time period
Price elasticity by numbers
% change in quantity demanded
% change in price
If a 10% price cut (=-10%) causes a 20% rise in quantity, PED will be -2
Income elasticity of deman YED
Income elasticity of demand is the relationship between the quantity demanded and consumer incomes.
Within a given market, the income elasticity of demand for various products can vary and of course the perception of a product must differ from consumer to consumer.