Supply & Demand
Demand; is the amount of a product that consumers are willing and able to purchase at a given price
FACTORS LEADING TO A CHANGE IN DEMAND:
- Price of substitutes
- Price of complements
- Change in consumer income
- Fashion, tastes and preferences
- Advertising and branding
- Demographics
- External shocks
- Economic climate
- Social and environmental factors
- Government
- Competition
- Seasonality
Supply; is the amount of a product which suppliers will offer to the market at a given price
FACTORS LEADING TO A CHANGE IN SUPPLY
- Changes in cost of production
- Indirect taxes
- Government subsidies
- Introduction of new technology
- Weather
- Government
- World events
- Price of related goods
Total revenue = price x quantity
PED:
Influencing factors:
- PED tends to fall the longer the time period this is because consumers and businesses are more likely to turn to substitutes e.g. Cheaper
- Substitute competition. Some businesses face highly price elastic demand for products due to being in a competitive market where their product is identical or little different from those produced by other businesses
- Branding. Stronger branding the less substitutes are acceptable to consumer reducing elasticity of demand
- Proportion of income spent on product. Inexpensive products where proportion of consumer income spent on transaction is very small demand is likely to be inelastic. Vice versa
YED:
Influencing factors:
- Basic good therefore a consumer’s need e.g. Food and water. Demand is income elastic
- Bought if can afford them e.g. Air travel, fashion and leisure. It is a form of discretionary expenditure
- Price of product relative to income. Can influence income elasticity if its expensive income elastic is cheap inelastic
Importance of YED to a business:
- Selling goods with high income elasticity means they are very sensitive to changes in income and are often cyclical. As the economy grows, demand grows. Vice versa. Forecasting demand for goods that are influenced by the business cycle are difficult
- Selling goods with low income elasticity means demand is more stable as their income inelastic. This means production planning and investment decisions are easier to make. In countries where economic growth is steady, over a period demand for inferior goods plus normal necessities tends to decline
- Production planning, businesses that produce goods with elastic demand know income will affect demand. If income expected to rise, future planning to meet capacity can occur and vice versa. When income falls, demand for inferior goods rise