1.2

• Demand

  Is the amount a product that consumers are willing to be able to purchase at any given price
• Factors leading to a change in demand

  Price of substitutes

  Price of compliments

  Change in consumer income

  Fashion, taste and preference

  Advertising and branding

  Demographics

  
  

  External Shocks:

  Competition

  Government - Raise in tax, dampen demand for some products

  Economic climate - If the economy is growing

  Social and environmental factors

  Seasonality
• Supply

  The amount of a product which suppliers would offer to the market at a given price
• Factors leading to a change in supply

  Changes in cost production

  New technology

  Government subsidies - Give money to a business in the form of a grant

  
  

  External shocks:

  World events - EG: Middle east been volatile causing supplies of oil to rise in price

  Weather

  Government - If interest increased then it could increase business costs for firms with debt

  Price of related goods
• Equilibrium price

  Where supply and demand are all equal
• Equation of total revenue

  $Revenue =$$Price × Quantity$
• Changes in demand

  If demand increases this means that price will also rise
• Increase in demand for a product has been shown by a shift in the demand curve to the right. price will go from P to P1 and quantity will go Q to Q1

  
  

  if it was to decrease then producers would have to lower prices or they would have too much unsold stock. Demand would start to shift to the left and demand will go from D to D2, quantity will go Q to Q2 and price will go P to P2

  
• Changes in supply

  If supply increases this would mean that price would fall
• Disequilibrium in the market


  Where price in a market is not set where supply and demand are equal
• Two situations of disequilibrium

  Excess demand

  Excess supply
• Price elasticity of demand


  When some goods a price change would result in a large change in demand and for others it would be a smaller change
• Price inelastic demand


  Means that change in demand would not be as big as the change in price
• Price elastic demand


  The change in demand was greater than the change in price
• Price elasticity of demand equation

  Price elasticity of demand = Percentage change in quantity demand / Percentage change in price
• Factors influencing price elasticity of demand

  Time - Tends to fall the longer the time period

  Competition of the same product - Business facing high demand for a product

  Branding - strong brand image , less competition

  Proportion of income spent on a product

  Product type vs product of an individual business
• Price elasticity if demand and pricing


  May consider demand when setting the prices of its products

  EG: minority of prodemand is price elastic. This means that there is a business raises its prices the. Price will be less the proportionate fall in demand
• Price elasticity of demand and total revenue


  When a business changes there prices, there will be a change in demand and a change in revenue
• One of the main factors that can change the demand for products is the amount of income consumers have to spend
• Income elastic demand


  • Demand rises proportionately more than the change in income (e.g. cars, fashion accessories, entertainment, holidays, luxury goods)
• Income inelastic demand

  • Demand rises proportionately less than the change in income (e.g. essential goods like milk, food, heating fuel)
• Factors influencing income elasticity of demand

  Necessities

  luxuries
• Significance of income elasticity is f demand to business

  High income elasticity - when the economy is growing , demand for goods is also growing

  low income elasticity - demand for goods are more stable during the different phases in the business cycle