Unit 2B:1 How businesses respond to markets.

Public sector - Activity ran by state, e.g NHS.

Private sector - Activity ran by private firms.

Command economy - Public sector, ran by government and administrators 'command' activity.

Transition economic system - The change from Command economy to Mixed economy

Mixed economy - Both public and private sectors

Free market - Private sector only, there are no entirely free markets, but many economies have a larger private sector.

Market forces - Supply/demand changing in a market, thus changing prices and business/consumer decisions. 

Entrepreneurs - People to take business risks.

Scarcity is used to describe the lack of resources compared to human needs/wants.

Choice - making choices based on what you can buy. This involved firms and consumers. E.g firms may choose between advertising and increasing capacity.

Opportunity cost - the option lost when making a choice or trade off.

The following are all factors that affect demand:

• Tastes - culture, preferences

• Substitutes - E.g Margarine vs butter.

• Complementary goods - things used together e.g Xbox games and an Xbox

• Income - How much people earn/can afford

• Population - How many people can buy your product (geographically)

• Price - Lower price = higher demand.

Here is an example of a demand curve, as price goes down, demand goes up.

Here is an example of a supply curve, as price goes up, supply goes up.

The equilibrium price is the price where supply and demand meet. (no excess)

If a product is price elastic it means a small change in price will cause a large change in demand. The following make a product elastic:

• The product has close substitutes
• The product is a luxury good
• The product has been around for a long time (e.g central heating)

If a product is a price inelastic it means for demand to change there needs to be a large change in price, an example is petrol. The following make a product inelastic:

• No close alternative/substitute 
• It is a necessity (e.g water)
• It hasn't been around for a long time (e.g Hybrid cars)

If a product is elastic then firms must be careful when pricing, as the wrong price could ruin the demand.