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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
Created by: durquhart1
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