the market

• Demand


  The quantity of a product that consumers want and are able to buy at a given price at a particular time

  - Shows that as the price of a product increases, demand decreases

  
• Influences on Demand


  - Substitutes

  - Complementary products

  - Consumer income

  - Fashion, consumer tastes and consumer preferences

  - Advertising and branding

  - Demographics

  - Seasonal changes

  - External shocks
• What happens when there is a rise in demand


  SHIFT TO THE RIGHT (OUTWARDS)

  - An increase in customer demand shifts the demand curve to the right (D1-D2)

  - However, at a price of P1, there is a shortage in the market. The price needs to rise to clear the market of excess demand

  - A new equilibrium quantity (Q2) is reached at a higher price than before (P2)
• What happens when there is a fall in demand


  SHIFT TO THE LEFT (INWARDS)

  - A fall in consumer demand shifts the demand curve to the left from D1 to D2

  - However, at a price of P1, there's a surplus in the market. The price needs to fall to clear the market of excess supply

  - A new equilibrium quantity (Q2) is reached at a lower price than before (P2)
• Supply


  The quantity of a product that suppliers are willing and able to supply to a market at a given price, at a given time

  - Shows that as the price of a product increases, supply of a product increases

  
• Influences on supply


  - Costs of production

  - Indirect taxes

  - Subsidies

  - New technology

  - Weather conditions

  - External shocks
• What happens when there is a rise in supply


  MOVES RIGHT (OUTWARDS)

  - At a price of P1 there is a surplus in the market. The price needs to fall to clear the market of excess supply

  - A new equilibrium quantity (Q1) is reached at a lower than before (P2)
• What happens when there is a fall in supply


  SHIFTS TO THE LEFT (INWARDS)

  - At a price of P1 there is a shortage in the market - the price needs to rise to clear the excess demand

  - a new equilibrium quantity (Q2)is reached at a higher price than before (P2)
• Equilibrium Price


  The price at which the quantity demanded equals the quantity supplied

  
• When there is a price increase...


  - if the price of a product was increased, this would cause a movement to the right along its supply curve, and a movement to the left along its demand curve

  - This would mean the quantity demanded (Qd) would be less than the quantity supplied (Qs)
• When there is a price decrease...


  - if the price of a product was decreased, this would result in a movement to the left along it's supply curve, and a movement to the right along its demand curve

  - This would mean there would be more demand than supply, and so there would be excess demand and therefore a shortage in the market
• Price Elasticity of Demand (PED)


  The responsiveness of demand to changes in price.

  The value is always negative.
• Interpreting Price Elasticity of Demand


  - a positive change in price causes a negative change in demand

  - a negative change in price causes a positive change in demand

  - PED: greater than 1 means that the product is price elastic

  - PED: less than 1 means it is price inelastic
• Price Elasticity of Demand Calculation


  % change in quantity demanded / % change in price
• Factors depending on PED

  - necessity of products

  - differentiation and brand loyalty

  - internet

  - product type

  - regularity of purchases

  - availability of substitutes
• Income Elasticity of Demand (YED)

  - The responsiveness of demand to changes in income.

  - Negative - Inferior Good (Y increases, QD decreases)

  - Positive - Normal Good (Y increases, QD increases).
• YED calculation

  % change in quantity demanded / % change in income
• Using Product Elasticity for PED

  1. helps decide whether to raise/lower the price of the product

  2. elastic: low and competitive to increase revenue

  3. inelastic: high prices and price skimming to increase revenue
• Using Product Elasticity for YED

  what happens to sales if the economy grows/ shrinks