1.3 introducing the market

• define effective demand, individual demand and market demand

  EFFECTIVE: quantity that consumers are willing to buy at the current market price.

  INDIVIDUAL: demand of an individual or firm

  MARKET: sum of all individual demands in the market
• individual demand curve and shows what would happen to quantity given an increase in demand

  As shown, an increase in demand leads to an increase in quantity, whilst maintaining price level "P1".

  
• how do prices affect the demand/supply curve

  Prices cause movements along the D/S curves,

  Prices do NOT cause shifts in the D/S curves
• PIRATES mnemonic meaning

  • Population
  • Income
  • Related goods
  • Advertising
  • Tastes and fashions
  • Expectations
  • Seasons
• 3 different types of supply

  • Joint supply
  • Composite supply
  • Competitive supply
• 3 reasons why the supply curve is upward sloping

  • if price increases, its more profitable for firms to supply the good
  • high prices encourage new firms to enter the market
  • larger output increases costs, which are passed onto consumers in the form of higher prices
• PINTSWC mnemonic meaning

  • Productivity
  • Indirect taxes
  • Number of firms
  • Technology
  • Subsidies
  • Weather
  • Costs of production
• how will exchange rates affect the level of supply

  a decrease in the exchange rate boosts the costs of imports (raw materials), which increase the cost of production for firms, thus shifting the supply curve to the left
• draw and describe a market in excess demand

  • P2 is below market equilibrium
  • Demand > Supply (Q3 - Q2)
  • Price increases, firms supply more, consumers demand less and market returns to equilibrium.

  
• cons of using the supply and demand model to explain real world problems

  • they only show certain markets
  • assume price increases means firms will supply more
  • assume perfect information
  • assume perfectly competitive markets
• what phrase describes the mechanism that determines market price

  the "invisible hand"
• 3 different functions of the price mechanism

  • rationing
  • incentive
  • signalling
• difference between a mass and niche market

  MASS: largest group of consumers for a product

  NICHE: smaller market, focused on a specific product
• why are niche markets generally better at allocating resources

  as niche markets target the consumers directly, rather than generally, they are closer to the consumer and therefore have a better idea of who needs what goods
• difference between primary and secondary research

  PRIMARY: research carried out directly

  SECONDARY: research is carried out via a third party
• evaluate the use of primary research over secondary research

  primary research is expensive but produces more specific findings than secondary research, which may not be as useful
• define market research

  collection of data in order to learn about the needs and wants of consumers
• disadvantage of using samples to analyse the market

  sample used may be biased, and therefore give invalid results
• market segmentation

  when the market is divided into categories of consumers based on their characteristics, needs.
• how could market segmentation benefit firms

  firms can better target their goods to fulfill these specific needs
• how does a market map work

  illustrates all the positions a product can take based upon 2 dimensions which are significant for consumers. It then identifies which existing products meet which consumer needs, thus identifying gaps for new market participants to fill
• examples of dimensions used in market mapping

  high vs low price

  high vs low volume

  high vs low quality
• when does a firm have a competitive advantage over other market participants

  occurs when the firm in questions produces better products than its competitors in the same market
• how can a firm gain a competitive advantage

  it can use price, quality, cost or a niche market to give itself a unique feature that makes it stand out from its competitors in the same market
• product differentiation

  act of distinguishing one product from another
• how can value be added to products and services

  value can be added to a product using a brand, quality, good service, unique features and convenience for the customer
• how do firms in a perfectly competitive market determine the prices of their goods and services

  firms must take the equilibrium price of the market, where supply = demand.

  N.B: These types of firms are price takers
• difference between stable market and dynamic market

  STABLE: rarely changes the prices of goods

  DYNAMIC: prices are constantly changing