1.2

• Demand: is the quantity that customers are willing and able to buy at a given price in a period of time.

  Basic law of demand - is that demand varies inversely with price, lower prices makes products more affordable for consumers.

  A CHANGE IN PRICE CAUSES A MOVEMENT ALONG THE DEMAND CURVE.
• Demand curve: negative correlation between price and quantity demanded, as the price increases, the quantity demanded decreases.

  
• Supply curve: A rise in the market price brings about an expansion of supply - producers are responding to the profit motive. A movement along the supply curve is cause solely by a change in price, all other factors remain constant.

  
• Supply

  Basic law of supply - as the price of a product rises, businesses expand supply to the market.

  Shift to the left: reduction in supply for another reason (not price).

  Shift to the right: increases in supply (not because of change in price).

  Main causes of shifts un supply: costs of production, new technology, external shocks and taxation & subsidies.
• Supply

  Cost of production - lower unit costs mean that a business can supply more at each price. E.g. higher productivity.

  Higher unit costs cause an inward shift of supply. E.g. rise in water rates or increase in raw materials. Include: materials, rent, fuel, salaries, advertising. As these increase, supply decrease. As these decrease, supply increases.
• Supply

  external shocks: economic downturn, war & natural disasters

  Technology change: 3D Printing supply: robots would increase the productivity of making a product, will decrease costs per unit - supply increases. 3D printing are forecasts to lead to a significant increase in demand and supply.

  Indirect taxes: VAT, DUTY, gov increases petrol prices

  SUBSIDY - any form of of government support, financial or otherwise offered to producers and sometimes consumers.
• Price elasticity of demand

  Factors influencing this: Seasonality, price, availability, demographics, advertising, promotions, legislation, social trends, substitutes and income.

  ELASTICITY - measures responsiveness of demand to demand to a change in price or income.

  PRICE ELASTICITY OF DEMAND - measures the extent to which the quantity of a product demanded is affected by a change in price.
• Price elasticity of demand :

  % change in quantity demanded/% change in price
• Price elasticity of demand:

  Price elastic - more than 1 - change in demand is more than the change in price.

  Price inelastic - less than 1 - change in demand is less than the change in price.

  Unitary price elasticity - exactly 1 - change in demand=change in price.
• Factors affecting PED

  Brand strengthen - products with strong brand loyalty and reputation tend to be price inelastic.

  Necessity - more necessary a product, the more demand tends to be inelastic.

  Habit - products that are demanded and consumed as a matter of habit tend to be price elastic.

  Availability of substitutes - demand for products that have loss of alternatives (substitutes) tends to be price elastic.
• Income elasticity of demand - measures the extent to which the quantity of a product demanded is affected by a change in income.

  formula:

  % change in quantity demanded/ % change in income
• Income elastic - more than 1 - as income grows, proportionally more is spent (sensitive to income change). E.g. consumer goods, expensive holidays, branded goods

  Income elastic - less than 1 - as income grows, proportionally less is spent on these goods (not sensitive to income changes). E.g. supermarket branded products, staycations, cheaper brands
• Income elasticity of demand

  Normal goods: a rise in consumer income will result in a rise in demand - clothes, cinemas.

  normal goods have a positive (+) YED

  Inferior goods: as income rises, the demand for these products fall. As income falls, the demand for these products rise.

  Inferior goods have a negative (-) YED
• Factors influencing YED

  Necessities - basic goods consumers need to buy.

  Luxuries - Goods consumers like to buy if they can afford them, demand for luxury goods is income elastic - the more we earn, the more we spend on these goods.

  Price - cheaper products tend to be inelastic - demand does not change with incomes.
• Significance of YED to businesses

  Businesses selling goods with high income elasticity:

  businesses that sell highly income elastic products may be affected by changes in the economy.

  Businesses selling goods with low income elasticity:

  Demand for goods that are income inelastic tends to be more stable during the different phases in the business cycle.