1.
2 Market
1.2.1 - Demand
Factors leading to a change in demand
Demand: The amount of good that consumers are willing and able to buy at a given price.
Factors leading to change in demand are:
Price of substitutes: People can buy cheaper substitutes. Eg. Sugar types
Price of compliments: Items that come with the product. Eg. Charger & iPhone, forks & knives
Alternative brands: Other brands of same product
Change in consumer incomes: if consuemers have more money, likely to buy at more expensive
places. Eg. New look over primark.
Marketing, advertising and branding: memorable adverts/ offers/ events - heavily influenced results
in more demand. Eg. Monopoly mcdonalds, harribos advert and cilit bang advert
Population structure/demographics: categories of people tend to share needs and wants. Eg. Baby
boom (increase in amount of babies born.) Uk population getting older.
Time of year: Eg. Pumpkins at Halloween
Weather and climate: Eg. Coats in winter (cold)
External shocks: Something that happends outside of the business/ country, a business has no
control over it. Eg. Coronavirus, tsunami, petrol crisis.
1.2.2 - Supply
Factors leading to a change in supply
Supply: the quantity of a good or service that a producer is willing and able to make available on the
market at a given rice, over a given period of time. It is what the business gives and sells.
Factors leading to change in supply are:
Price: as price increases, a business will want to supply more, in anticipation of higher profits.
Cost of production: Can increase due to cost of materials or a rise in minimum wage. Less cost for
capital intensive production. Business may decide to produce less or increase price.
Indirect taxes: When government increase tax on goods such as petrol, supply will decrease. VAT,
customs tax, excise tax are all indirect taxes and when applied to goods, it makes supplying them
less attracitive. This can lead to a decrease in supply Eg. VAT
Government Subsidies: money given by government to encourage more suppliers to enter the
market and to supply more - this increases supply. Eg. Electric chargers for car, solar panels
External shocks: Events that happen outside of business and its control an businesses may not want
to supply at current levels. Eg. Changes in oil price: can affect transport costs, bad weather: ruins
crops, war: can prevent supplying to that country.
1.2 Market
1.2.3 – Markets
The interaction of supply and demand
Price up = demand down
If businesses costs increase, they try to absorb costs so customers don’t have to pay more. Eg.
McDonalds
The drawing and interpretation of supply and demand diagrams to show the causes and
consequences of price changes
This is what the Demand and Supply curve each look like on a graph
along with the axis of price on the y axis and quantity on the x axis.
Demand curve shows how the price affects the quantity demanded.
As price increases, demand decreases or contrastingly as price
decreases, demand increases.
Supply curve shows how the higher the demand, higher they can
raise the price.
The demand and supply curve link at a point of demand which they
can supply at which also is a good price?
Demand curve – Price Supply curve – Price
These curves depend on the factor of price only. They can only ha a movement up or down the line.
Supply curve – Non price
This supply curve depends on non-price factors like time of year,
external shocks, demographics, weather and climate, etc. There is
no movement up and down lines but a shift of the entire line itself.
For example, if there was a war (external shock), the supply would
be limited and therefore the supply line shifts to the left. This means
that the price increases and on top of all that, demand increases too
Demand works similarly in the opposite way, for example it is winter
(time of year) so demand for coats increase, therefore price
increases and supply increases and they all meet at a point.
1.2.4 - Price elasticity of demand
- Measures responsiveness of demand to a change in price
- can be Elastic / Inelastic
- Elastic means demand changes depending on price, Inelastic - demand stays the same when price changes
- PED values are always a negative value
Calculation of price elasticity of demand
PED=
Interpretation of numerical values of price elasticity of demand
The value will tell you the elastic/inelastic demand
Below -1
PED calculated value below -1 will mean that the demand is elastic, such as -2.3 or -1.3 etc.
Elastic demand: Business adjusts prices and therefore demand changes too. Products and services
are responsive to a change in price.
Price increase = demand decrease | Price decrease = demand increase
Customers may go and buy other alternative/ substitutes. Products with lots of substitutes have
elastic demand. Eg. Fast food as it is not necessary.
Between 0 and - 1
PED calculated to be 0 – 1 means that demand is inelastic
Inelastic demand: Demand stays the same if prices change. This can be due to very few substitutes
Eg. Petrol, insulin, cigarettes.
For example. If you run out of fuel in your car, you to garage. There is only choice of diesel and
petrol, no substitutes, cannot drive away if unhappy with price.
The factors influencing price elasticity of demand
Availability of substitutes
When more substitutes are available, there is more sensitive demand.
Frequency of purchase
Frequently bought items are elastic (eg. Food)
Necessity (stable goods)
Lower elasticates/ inelastic due to the fact that consumers NEED the product – constant same
demand. (Eg. Petrol)
Luxury goods
Tends to be expensive = consumers will pay attention to the cost
Competitive Pricing
Some products are priced similarly
Price skimming
High start (has to be unique and have USP) (Eg. Apple) so business can maximise revenue
The significance of price elasticity of demand to businesses in terms of implications for pricing
Businesses can calculate how sensitive their prices are to demand and if they get a value between 0
and -1 they can charge any prices they want, however if the PED is below -1 the business has to price
its product/service carefully to ensure they make profit but maintain demand.
Calculation and interpretation of the relationship between price elasticity of demand and total
revenue
Revenue = quantity x price
Exam questions:
Example question : 500 products per week, PED =-0.4, 10% increase, calculate quantity which will be
demanded after.
?/10% = -0.4
? = 10 x -0.4
? = -4 = % change in quantity demanded
1.2.5 - Income elasticity of demand
Income elasticity of demand is the responsiveness of a change in demand of a change in
income
Calculation of income elasticity of demand
Interpretation of numerical values of income elasticity of demand
Inferior Goods: a good whose demand decreases as customer income increases (eg. Pot noodles)
people wont buy cheaper alternatives because they would have more money to spend on better
quality items.
YED value for an inferior good will be less than 0 (negative) y < 0. Eg. Charity shops have a YED of -1.5
Normal goods: goods which consumer demand increases as their income increases because they can
afford proper things instead of off-brands and cheaper substitutes
YED value for a normal good will be between 1 and 0 (positive) 0 < y < 1
Luxury goods: when increase in income = increase in demand as more people can afford luxury
items.
YED for luxury items is above 1 (positive) 1 > y
The factors influencing income elasticity of demand
Type of Good:
Goods that are a necessity are typically inelastic, meaning that a change in price is unlikely to
impact demand. If the price of gasoline rises, for example, the demand doesn't change all that
much since people need to use their cars to get to work. Comfort and luxury goods tend to be more
elastic because changes in an economic variable might lead to less consumer demand.
Price:
For example, the change in the price level for a luxury car can cause a substantial change in the
quantity demanded
Substitute availability:
If there is a readily available substitute for a good, the substitute makes the demand for the good
elastic.
The significance of income elasticity of demand to businesses
Inferior goods:
- income up = demand down
- income down = demand up
Normal goods:
- income up = demand up
- income down = demand down
