Workbook 3: The Market

• Demand is the quantity of a good or service that consumers are willing and able to buy at a given price
• The law of demand states that as the price of a good or service increases, the quantity demanded decreases. Vice versa
• PASIFICS, are causes of changes in demand, other than price.

  P - Population

  A - Advertising

  S - Substitute (competition)

  I - Income

  F - Fashion

  I - Interest rates

  C - Confidence/Compliments

  S - Seasons
• Complementary goods are goods that are purchased together because they are consumed together (e.g. Razor's and Razor blades)
• Inferior goods are goods which demand will fall if income rises or rise if income falls
• Normal goods are goods which demand will rise if income rises and fall if income falls
• Substitute goods are goods that can be bought as an alternative to another good
• Luxury goods are goods that are not essential for survival but are desired by consumers
• Supply is the quantity of a good or service that producers are willing and able to supply at a given price
• The law of supply states that as the price of a good increases, the quantity supplied by producers will increase. Vice versa
• CATCATS, are the main causes of change in supply

  C - Cost of production

  A - Availability of 'fops' (land, labour, and capital)

  T - Technological progress

  C - Climate

  A - Amount of supplier's

  T - Taxation (Indirect)

  S - Subsidies
• Equilibrium is the market clearing price. Where supply = demand
• Elasticity measures the responsiveness of demand to a change in a relevant variable (e.g. price or income)
• PED = %change in demand / %change in price
• Price elasticity of demand is the responsiveness of demand to a change in price

  • If value of PED is > -1, then change in demand is more that change in price (elastic)
  • If value of PED < -1, then change in demand is less than the change in price (inelastic)
  • If value of PED = -1, then change in demand = change in price
• Percentage change = (new value - old value) / old value x 100
• Income elasticity of demand is the responsiveness of demand to a change in income

  • Income elastic: %change in demand > %change in income
  • Income inelastic: %change in demand is < %change in income
• YED = % change in quantity demanded / % change in income
• Discretionary expenditure is the amount of money that households spend on non-essential goods and services