Economics- Topic 1

edexcel economics and business 2.b.1

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The quantity of a good or service consumers are willing and able to buy at a given price in a given time period

Factors affecting demand:

  • Advertisement
  • Media image
  • Substitute good
  • Complementary good
  • Changes in income
  • Seasonality
  • State of the economy
  • Demand curve shift to the right=Increase (Income increase, advertisment, price of vodka drops, price drop)
  • Left = Decrease (Poor media image, price of pepsi decreases (Coke),
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Supply is defined as the quantity of a product that  a producer is willing and able to supply onto the market at a given price in a given time period.

  • Has positive correlation (As price increases so does supply)

Factors affecting supply:

  • Government policy. Can decrease or increase. Subsidy decreases costs, thus increases supply. Tariff increases costs, decreases supply. E.g. Chinese tyres.
  • Weather
  • Access to resources. Increase, less transport costs
  • Price
  • Costs; raw materials, rent etc. Higher costs= less supply
  • How much customers are willing to pay
  • Market equilibrium= The price at which supply meets demand (Above it there is excess supply, below there is excess demand
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Price Elasticity of Demand

  • Measures the extent to which demand reacts to a change in price
  • If PED=0, then the demand curve will be vertical, ie demand will stay the same with a price increase.
  • If PED= between 1 and 0 then demand is inelastic (more vertical)
  • If PED= 1 then it is unit elastic (Price changes at the same rate as demand)
  • If PED= more than 1 then demand is elastic (more horizontal)
  • PED can be used to:
  • Predict change in demand on the revenue of a product
  • Price volatility in a market following changes in supply
  • Effect of government indirect tax on demand.
  • Used to help determine price if the price is discriminating.
  • % change in quantity demanded/% change in price
  • New-Original/Original *100
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Factors affecting PED

Existence of close substitutes:

  • Will be more elastic with competition, as increase in price will decrease your demand.
  • Water is much more inelastic. People will buy it no matter the price.


  • Things become more elastic over time, as it takes time to adapt.
  • People will make more adjustments over a longer time period.

Branding and Brand Loyalty

  • These are the products that are bought without checking the price tag.
  • Often high quality products. E.g. Rolex, Harley etc.
  • Strong branding creates customers who buy out of loyalty rather than price.
  • Necessity/Addiction
  • Peak/Off Peak travel
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The Purpose of Marketing in Changing Markets

  • Market Share: The share of sales in a market which one business has, normally expressed in %.
  • Non-Price Competition: Includes all possible inducements to buy the product other than a price cut. E.g. Design, advertising, reliability etc.
  • Market Segment: A subdivision of a market in which consumers have distinct charecteristics and preferences. E.g. Socio-Economic Group A

What are the benefits of high market share?

  • Increased price. No alternative. Will have to pay a high price
  • Decreased customer service= Decreased costs.
  • Increased sales- Higher revenue
  • Economies of scale e.g. Bulk buy discount
  • Monopsony power
  • Increased brand image and awareness
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Advertising Standards

  • Marlborough **** not advertised on F1 cars anymore

Advertising Standards Agency:

  • UK's independent regulator of advertising across TV etc.
  • Magners banned in 2009 because it  implied that alcohol lead to success of a social occasion.

Corporate Social Responsibility:

  • Accepting that organisations must take responsibility for their impacts on the community and environment, show consideration and behave ethically.
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Income elasticity of Demand

  • Describes the extent to which demand for a product alters as a result of a change in people's real disposable income.
  • Measured by YED.
  • Normal Good: Products or services which we buy more of when income rises
  • Inferior Good: Products which we buy more of when income falls.
  • Luxury Good: Goods that people buy when they feel better off.
  • If YED = +ve: Then the product is normal or luxury
  • If YED=  -ve: Then the product is inferior
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Growth of Markets

  • Growth of Low Cost Airlines
  • 50 european low cost airlines
  • 8 million passengers in 1998- 59 million in 2005.
  • Made it possible for those who couldn't fly before.
  • EasyJet + RyanAir have 30% market share.
  • The Rise of High Street Coffee Shops
  • £900m a year industry
  • First Starbucks opened in 1971.
  • Now SB has more than 1000 branches in the UK.
  • 16% market share
  • Costa Coffee operates in 28 countries around the world.
  • 150 high street coffee shops open in the UK each year
  • The Long Tail
  • Selling a large number of unique products in relatively small quantities.
  • Internet has introduced it. E.g Amazon and iTunes
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