business theme 1.3

• Demand


  The number of products customers are willing and able to buy at a given price
• Complementary good


  A good that is consumed together with another good, such as cars and petrol
• Normal good


  A good for which demand increases as consumer income rises
• There is a negative correlation between the quantity of a product demanded by customers and its price
• When prices increase


  The quantity demanded decreases
• Non-price factors affecting demand


  Factors other than price, such as changes in income or seasonality, that lead to a shift in the entire demand curve
• Substitute good


  A replacement good, such as a different brand of car
• When prices decrease


  The quantity demanded increases
• Inferior good


  A good for which demand decreases as consumer income rises
• An increase in spending on advertising is likely to shift the demand curve to the right
• Supply


  The number of goods/services businesses are willing to sell at a given price in a specific time period
• There is a positive correlation between supply and price
• When prices increase


  The quantity supplied increases
• Non-price factors affecting supply


  Factors other than price that cause a shift of the entire supply curve, such as new technology or government subsidies
• A change in any non-price factor that leads to less supply will shift the supply curve to the left
• Indirect tax


  A tax that causes an increase in the costs of production, such as value-added tax (VAT)
• When the price decreases

  The quantity supplied decreases
• Subsidy


  A form of financial assistance given to a business by the government that reduces the costs of production
• The introduction of automated production processes is likely to shift the supply curve to the right
• External shock


  An unexpected event that can change the quantity of a good or service supplied
• If the supply curve shifts to the left


  The equilibrium price increases
• Market


  Any place that brings buyers and sellers together to trade at an agreed price
• Market equilibrium


  The point where the quantity demanded equals the quantity supplied at a specific price
• At the equilibrium price, sellers will be satisfied with the quantity of sales
• At the equilibrium price, buyers are satisfied that the product provides benefits worth paying for
• If the selling price is set above the market equilibrium

  There will be a surplus
• If the demand curve shifts to the left

  The equilibrium price decreases
• A rise in demand

  Causes the demand curve to shift to the right, leading to a new equilibrium with a higher price and quantity
• Shortage


  When demand exceeds supply at a given price
• An increase in supply

  Causes the supply curve to shift to the right, leading to a new equilibrium with a lower price and higher quantity
• Price elasticity of demand (PED)


  A measure of how responsive the change in quantity demanded is to a change in price
• The PED value is always negative because there is a negative correlation between price and demand
• Price elastic demand


  Demand is more responsive to a change in price
• Price inelastic demand


  Demand is less responsive to a change in price
• If PED is between 0 and -1, it is a price inelastic good
• When the price of a price inelastic good increases


  Total revenue increases
• When the price of a price elastic good increases


  Total revenue decreases
• Demand for luxury goods is likely to be price elastic
• Income elasticity of demand (YED)

  Measures how responsive the change in quantity demanded is to a change in income
• If the income elasticity of demand is greater than 1, it is a luxury good