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Market
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Term | Definition |
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Income Elasticity of Demand | Measure of the sensitivity of changes in demand to changes in income |
IED Formula | % change in demand / % change in income |
IED Luxury Goods | Figure is above 1 |
IED Normal Goods | Positive income elasticity that is below 1 |
IED Inferior Goods | Income Elasticity is below 1 |
Income elastic Value | Below -1 and above +1 |
Income inelastic Value | -1 up to +1 |
Necessity Goods | IED of between 0 and 1 |
Factors that Influence IED | Recession/Consumer Incomes/Economic Growth |
Effects on goods during a recession | Demand for substitute goods and inferior goods will rise and the demand for luxury goods will fall sharply |
Price Elasticity of Demand | A measure as to what extent sales of a product are affected by a change in its price |
PED Formula | % change in demand / % change in Price |
Price Elastic Demand Value | Demand is sensitive to price changes e.g. holidays are sensitive to price changes. Value is bigger than 1. |
Price Inelastic Demand Value | The value will always be less than 1 when the good is price inelastic e.g. –0.5 would be an inelastic product |
Effect of Price rise on Price Elastic Product | Total revenue will fall |
Effect of Price rise on Price Inelastic Product | Total revenue increases |
Effect of a price cut on Price Elastic Product | Total revenue increases |
Effect of a price cut on Price Inelastic Product | Total revenue falls |
Problems of Price Elasticity of Demand | Price elasticity will change over the period of the economic cycle e.g. it will be affected in a recession/Tastes and fashions are constantly changing/difficulty in finding accurate information |
Supply | The amount of a good or service that producers are willing and able to sell at any given price |
Supply Curve | A graphical representation of the relationship between price and quantity |
Price Equilibrium | Found where supply and demand are equal. This is the point where both sellers and buyers are happy with the price and quantity. |
Market Forces | Push prices towards market equilibrium – the price at which demand equals supply |
Price Rises | As price rises quantity supplied increases |
Price Falls | As price falls quantity supplied decreases |
Costs of Production | Created by the price of factor inputs i.e. the factors of production |
Taxation | Charge placed on individuals or firms |
Indirect Taxes | Those placed on goods and services produced by individuals and firms e.g. VAT and Duties |
Subsidies | Involve finance provided by the government to encourage suppliers to produce goods and services. Subsidies will make it cheaper to produce a product therefore, the quantity supplied of that product will increase |
External Shocks | Unexpected events that are outside of the businesses control but have a direct impact on the level of supply e.g. outbreak of a disease (bird flu) |
Shifts in the Supply Curve | If the change in supply is caused by any factor other than price then the supply curve shifts e.g. An increase in supply is shown by a shift to the right and a decrease in supply is shown by a shift to the left |
Demographic Factors | Statistical characteristics of the population, these include for example: Age, Migration, Gender and Ethnic mix |
Seasonality | Refers to fluctuations in demand depending upon the time of year. It exists because of: Changes in the weather and Public holidays e.g. Christmas and Ramadan. |
Substitute Products | Acts as an alternative, therefore creating competition e.g. Coca cola and Pepsi |
Demand Curve | Graphical representation of the relationship between price and quantity demanded. As price falls quantity demanded rises and as price rises quantity demanded falls. |
Demand | The amount society is willing and able to buy at a set price at a given point in time |
Normal Good | One where, if price rises, demand will fall and vice versa i.e. there is a negative correlation |
Shifts in the Demand Curve | An increase in demand is shown by a shift to the right.A decrease in demand is shown by a shift to the left |
Market | Any place where buyers and sellers meet to trade products |
Determinants of Demand | Income/Price of other goods/Tastes and preferences/ expectations of future prices e.g. you think the product may fall in price in the near future |