1.2, Demand

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How does demand decide for businesses whether or not to sell a product/service?
Because if there is significant demand or potential demand for the product then businesses will make a profit however if there is no demand for the product then this will leave the business making no money.
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What is meant by effective demand?
The point when a quantity of goods/services is desired at a certain place.
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What is used to show how demand increases/decreases with price?
Supply and demand curve
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What happens to the price when demand is high for a product?
The price is low
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What happens to the price when demand is low for a product?
The price is high
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What does the basic law of demand show?
The relation between price and demand from the perspective of ceteris paribus (all other things being equal).
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What will a change in price do?
Create a movement along the demand curve, it won't cause an actual shift in demand.
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What are the main factors that lead to a shift in demand? (8)
Disposable income, Substitute goods, Complementary goods, Fashion tastes and preferences, Successful advertising and branding, Demographics (structure in pop.), Adverse external shocks (e.g war), Seasonality .
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How can disposable income effect demand? And would the shift curve be left or right?
If people have more money, which will increase demand, causing a shift in the demand curve. If the demand increases the price will increase accordingly. Shift curve would be right.
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How can complementary goods effect demand? And would the shift curve be left or right?
If a product decreased in price, e.g lamb, this would increase the demand and therefore the possible demand of mint sauce as it compliments the lamb. The curve would shift left.
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What does supply show?
It shows the quantity of products/services that a business is prepared to provide at a certain price.
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What does a higher market price give to suppliers?
A higher incentive to sell their products and so quantity supplied is hight
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What does the basic law of supply show?
Shows how price creates movement up and down the supply curve.
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What are the main factors which lead to a shift in supply? (5)
Increasing cost of production, New technological improvements, Indirect tax, Government subsidies, Adverse external shocks.
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How does an increase cost in production lead to a shift in supply?
If there is an increase cost in production for a business they will find it harder to supply large quantities of goods.
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How does an government subsidies lead to a shift in supply?
Some businesses are given funding by the government (e.g agriculture where crops are vital to the country). Increase in available funds would allow the business to supply more goods.
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What is market equilibrium?
The point where price and quantity meet. Suppliers are willing to sell their goods at the right price for the consumer and have enough quantity to satisfy demand.
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What might happen if the business sells their products at a price lower than the market equilibrium?
May turn suppliers away, who then supply a lower quantity of goods.
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What might happen if the business sells their products at a price higher than the market equilibrium?
Allows suppliers to increase the quantity of products they can offer however producers will have a surplus of goods that few people are demanding.
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What usually happens when there is an increase in demand?
Suppliers will often raise their price accordingly. A price in rise will usually see suppliers are willing to sell more goods.
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What are some factors that may increase demand?
Fashion trends, disposable income, price of product.
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What usually happens when there is an decrease in demand?
When demand falls (due to any other factor than price), suppliers will often lower their prices and the quantity of goods they are prepared to produce.
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Why might a decrease in demand occur?
Seasonality, external factors, price, decrease in disposable income.
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What usually happens when there is an increase in supply?
Price usually decreases, which will increase in the quantity of goods producers are willing to supply.
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Why might there be an increase in supply?
Reduced production costs and new technology, Business expansion, Lower taxes, Government funding.
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What usually happens when there is an decrease in supply?
Price usually increases which leads to a decrease in the quantity of goods producers are willing to supply.
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Why might there be an decrease in supply?
External factors, Government policies, Increase in production costs,
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What does PED (price elasticity of demand) show?
How responsive, or sensitive, the demand for a product/service is to price. It shows how likely demand is going to rise or fall depending on the price of the product/service.
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What is the formula for PED?
% change in quantity demanded / %change in price
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What does the PED mean if a product/service is equal to 0?
There is a complete price inelasticity of demand. Even if the price changes, there will be no change in demand for the product.
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Give some examples of products which will be complete price inelasticity of demand.
Petrol, iPhones, cars, (essential products)
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What does the PED mean if a product/service is less than 1?
The demand for the product is inelastic. This means that the consumer demand is not very sensitive to changes in price, so a business selling a price inelastic product can increase the products price without damaging its total revenue.
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What does the PED mean if a product/service is equal to 1?
There is a unitary price inelasticity of demand. This means the percentage change in demand is exactly the same as the percentage change in price.
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What does the PED mean if a product/service is greater than 1?
The demand for the product is price elastic. This means that consumer demand is quite sensitive to changes in price. If a business sells a product that is price elastic, it can decrease the products selling price and hope to inc its tot rev. incom
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What factors influence PED?
Brand loyalty of the consumer, Available disposable income, Frequency of purchase, Necessity of the product, Time.
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What does income elasticity of demand (YED) show?
Shows how sensitive demand is to an increase or decrease in consumer income.
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What is the formula for YED?
% change in quantity demand / % change in income
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What if the answer of YED is greater than 1?
Shows that demand is income elastic. Usually applied to luxury goods.
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What if the answer of YED is between 0 and 1?
Income inelastic. Usually applied to goods we purchase every day, e.g milk.
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What if the answer of YED is less than 1?
Negative income elasticity. If income goes up, quantity will go down and vice versa. Usually applied to inferior goods such as cheap bread, potatoes etc. People usually will purchase better quality products if they have a greater income.
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What are some factors which can influence Income Elasticity of Demand?
Luxury, necessity or inferior goods. Expectations of income, such as promotion, job loss and recession.
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Why is PED important to businesses?
Businesses use PED to determine the effect that changes in pricing policy will have on their rev. income. Decide to operate a policy of price discrimination - if a product is price elastic, it wouldn't be good to increase the price of it.
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Why is YED important to businesses?
Helps business find ways to increase market share (lower prices) - however this wouldn't work if the product was price inelastic. Helps businesses decide how to organise its production output in response to changes in consumer income.
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What is meant by shortage?
If the market price of a product is low, firms may not want to sell because it is not worth their while. However, consumers will be more interested in lower prices and so demand will rise, leaving suppliers with more demand than they can manage.
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What is meant by surplus?
If the market price of a product is high, suppliers are more willing to sell and so provide more goods. Consumers may not want to pay higher prices and so buy fewer products, leaving suppliers with a surplus.
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Card 2

Front

What is meant by effective demand?

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The point when a quantity of goods/services is desired at a certain place.

Card 3

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What is used to show how demand increases/decreases with price?

Back

Preview of the front of card 3

Card 4

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What happens to the price when demand is high for a product?

Back

Preview of the front of card 4

Card 5

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What happens to the price when demand is low for a product?

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