Supply and Demand -2

  • Created by: MartynaZ
  • Created on: 27-05-19 14:54

Factors Affecting Demand

  • Price
  • Income
  • Interest rates
  • Substitutes 
  • Complements
  • Taste and fashion
  • Legislation
  • Advertising and brand
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Factors Affecting Supply

  • Price 
  • Costs of production
  • Vat /Corporation Tax
  • Subsidies
  • Weather
  • Improvements in technology
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PED measures the responsiveness of demand to a change in price.

Price Inelastic

Necessities such as water ,power ,basic foods ,addictive goods such as cigarettes

PED is between 0 and -1. Demand is not sensetive.

Price Elastic

Goods that have lots of alternatives e.g. washing powder ,cornflakes ,cinema

PED is greater than -1. Demand is very sensetive.

Unit Elastic

TR stays the same as the price increase leads to the exact same decrease in demand 

PED is = -1

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Price elasticity of demand is always negative because price and quantity move in opposite directions on the demand curve.

The objectives for most businesses would be to make the price elasticity of demand of their goods/services more inelastic .

Businesses can make demand for their goods more price inelastic if they do the following:

  • Encourage customer loyalty
  • Reduce or restirct competition in the market 
  • Increase brand value (e.g. branding ,USP)

Factors Influencing PED                                                                     Factors Influencing YED

  • Number of close substitutes                                     .  Degree of attractiveness of  the product
  • Habitual purchasing                            .  How large the proportion of income is spent on the item
  • Luxury or essential products 
  • Cost of switching between products
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Income Elasticity of Demand

Income elasticity of demand measures the responsiveness of demand to the change in income.

Income Inelastic 

  • Normal goods e.g. cars ,furniture ,washing machine
  • Positive income elasticity of demand    when Y^ = D for normal goods ^
  • YED between 0 and 1

Income Elastic

  • Luxury goods e.g. gym membership
  • More sensitive to a change in income    when Y^ = D for luxury goods ^
  • YED is greater than +1

Income Elastic Negative 

  • Inferior goods e.g. tesco own brand soup
  • Negative income elasticity of demand    when Yv = D for inferior goods ^
  • YED is less than 0
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Competition is where two or more sellers of similar goods or services act independently to persuade buyers to choose their products.

The competetive environment is how fiercely other businesses compete with products that another business makes .^Bs in the market = ^Competition 

Nature and Intensity of Competition

  • Ease with which firms can set up and compete (barriers to entry)
  • Number of firms operating 
  • The extent to which rival firms offer differentiated products 
  • Amount of control businesses exert within their market
  • The extent to which an individual business can determine price of their products
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Barriers to Entry (Requirements)

  • High capital /investment to set up
  • Strong brand identity of existing firms products
  • Economies of scale -These reduce average costs of production making it difficult for new entrants to compete
  • Acess to factors of production e.g. raw materials , land ,labour ,skilled staff
  • Acess to distribution networks -How easy it is to get a product into a shop
  • Behaviour of existing firms e.g. retaliation through short term pricing strategies
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Perfect Competition

Large number of small businesses competing. No one single business is large enough to influence activities of others.

Perfect competition is based on characteristics such as

  • Infinite number of individual buyers.
  • Products in the market can be easily substituted .This means there is no branding ,no product differentiation and no way of telling products apart.
  • There are no market leaders and no price leaders so each business must accept the going price on the market place -theyre price takers
  • There are few transaction costs involved in searching for the required info about prices. Likewise sellers have perfect knowledge about their competitors.
  • Businesses are free to leave or enter the market at any time. There are no barriers to entry or exit.
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A monopoly is where there is only one dominant business or a single producer within a market.

A pure monopoly is where one business has 100% of the market place. In practice this is very rare and therefore a legal monopoly exists when one business has over 25% market share.

A Monopoly is Based on a Number of Characterisitics such as :

  • Price Maker -No close substitutes can control what price is set.
  • Barriers to Entry -Difficult/ impossible for new competitors to enter the market.
  • Unfair Competition -May apply predatory pricing when a new competitor attempts to enter the market.
  • Tend to be heavily regulated - Protect customer from unfair competition.
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Monopoly Benefits and Drawbacks

Benefits of a Monopoly 

  • Supernormal profits
  • Possess specialist expertise 
  • Could invest profits into R&D benefiting the consumer 
  • Profits can be reinvested into improving production techniques ,a faster rate of technological development and developing new products
  • Being big they can benefit from economies of scale ,reducing prices and making goods affordable  

Drawbacks of a Monopoly

  • Businesses may become complacent and inefficient due to the lack of competetive pressure
  • Businesses may become a price maker and change higher prices
  • Choice is restricted for consumers
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Oligopoly -Many firms within a market that is dominated by a few large competitors each of which has control over the market.

An Oligopoly is based on characteristics such as 

  • Differentiated products
  • Stable pricing -customers wont go to competition
  • Barriers to entry

Businesses in this market structure may engage in collusion or price fixing. When businesses in an oligopolistic market act together (collude), a cartel is formed. A cartel is an association of manufacturers or suppliers formed with the purpose of maintaining high prices and restricting competition.

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Monopolistic Competition

Monopolistic competition -Where a large number of relatively small businesses are in competition with each other.

Monopolistic Competition Characteristics

  • Businesses have some control over price 
  • Few/ low barriers to entry
  • Products are similar but not exact substitutes 
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Consumer Protection

Consumer Protection -Number of laws which increase consumer confidence to purchase.

Reasons for protecting customers against exploitation

  • Profit Motive -Businesses can overcharge customers for unsatisfactory products.
  • Unsafe products -due to reduced production costs
  • Unfair advertising/ misleading information
  • Pressurised sales tactics -falsley stating that a product will be available for a limited time
  • Online buying can be misleading 
  • Globalisation -protection from foreing goods produced below UK/EU standard 
  • Description of goods 
  • Scientific advances -proper testing has to be carried out before products can be sold to consumers e.g. medicine 
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Consumer Protection Legislation

  • Sale and supply of goods act -goods must ne safe and fit for their intended purpose 
  • Data protection -controls the use of stored customer details 
  • Consumer proftection -laws making sure businesses act fair towards customers 
  • Consumer protection from unfair trading regulations -Legislation that makes it a criminal offence for businesses to engage in unfair business practices e.g. harassment
  • Trade description act -goods/services must perform in the way advertised by the business
  • Consumer credit act -control the way that businesses lending money operate 
  • Environmental protection -laws that protect the environment e.g. clean air act
  • Competition policy -laws ensuring fair competition takes place in each industry 
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Consumer Protection

The Role of the Ombudsman - Ombudsman services are available for various industries and offer complaints procedures for disatisfied customers. Services are set up by the Gov. and free for consumers to use.

Trading Standards Department -All local authorities have a trading standards deparrtment. The department is responsible for checking that local businesses are complying with the various trading laws e.g. ensure no counterfit goods are being sold

Competition and Markets Authority (CMA) -CMA was set up by the Gov.

Role of CMA:

  • Investigating mergers /takeovers which restrict competition
  • Conducting market studies and investigations 
  • Bringing criminal proceedings against individuals who commit the cartel offence 
  • Enforcing consumer protection legislation
  • Co operating with sector regulators and encouraging them to use their competitive powers
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Ethical Issues Related to Consumer Protection

  • Subliminal advertising -placing hidden images in Tv in hope that viewers will process them unconciously 
  • Product placement -when a company pays TV to include its products or brands in a programme 
  • Unhealthy snacks by till -changed to less implusive purchases to reduce pestor power from kids
  • Target expensive brands at children
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