Demand (AQA A Level Business): Flashcards
Exam code: 7132
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- FrontInfluences on Demand
Define demand.
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Define demand.
Demand is the quantity of a product that consumers are willing and able to buy at a given price over a given period.
How can a rise in the price of a substitute affect demand?
If a rival product becomes more expensive, consumers may switch, increasing demand for alternatives. For example, a rise in the price of beef may increase demand for chicken.
Define complementary products.
Complementary products are products that are used together, so if the price of one rises, demand for the other may fall.
True or False?
Rising consumer incomes tend to increase demand for most products.
True.
When incomes rise, consumers can afford to buy more, so demand increases for most products. During a recession, consumers cut spending.
Shifts in population size, age structure or household composition are known as _________ change.
Shifts in population size, age structure or household composition are known as demographic change.
How might a business adapt its price when demand rises?
With stronger demand, a business may maintain or raise prices with less risk of losing customers.
How might a business change its product when demand falls?
A business may introduce new features, rebrand or launch extension strategies to revive interest.
Define cyclical demand.
Cyclical demand is demand that rises and falls in line with the economic cycle, increasing during growth and falling during recessions.
True or False?
Demand for own-label products tends to fall during a recession.
False.
Own-label products often have counter-cyclical demand, which rises during recessions as consumers seek value.
Define seasonal demand.
Seasonal demand is the predictable change in demand at different times of year, driven by weather, holidays or cultural events.
How might a business adjust its pricing for seasonal demand?
A business may charge premium prices during peak season and reduce prices off-peak to maintain sales volume.
During a recession, businesses may focus marketing on value and ___________ and cut costs to protect profitability.
During a recession, businesses may focus marketing on value and affordability and cut costs to protect profitability.
Define price elasticity of demand.
Price elasticity of demand (PED) measures how responsive the quantity demanded of a product is to a change in its price.
PED = % change in quantity demanded ÷ % change in price
Why is PED always a negative value?
There is an inverse relationship between price and quantity demanded: when price rises, quantity demanded falls.
What does a PED value of −2.4 show?
Demand is price elastic: for every 1% increase in price, demand falls by 2.4%.
A business cuts its price by 25% and sales rise by 18%. What is the PED?
PED = 18% ÷ −25% = −0.72, so demand is price inelastic.
True or False?
Demand with a PED of −0.5 is price elastic.
False.
A PED between 0 and −1 shows price inelastic demand: demand changes by less than 1% for every 1% change in price.
PED will be more price inelastic for goods that have fewer _________.
PED will be more price inelastic for goods that have fewer substitutes.
How does brand loyalty affect PED?
Strong brand loyalty makes demand more price inelastic, so loyal customers are less likely to switch when prices rise.
True or False?
The longer the time period, the more price elastic demand is likely to be.
True.
Over a longer time period, consumers have more time to search for alternatives, so demand becomes more price elastic.
How does the proportion of income spent on a product affect PED?
The smaller the proportion of income spent on a product, the more price inelastic demand will be.
What happens to total revenue if a business raises the price of a product with price elastic demand?
Total revenue falls, because demand changes by more than 1% for every 1% change in price.
True or False?
Cutting the price of a price inelastic product will increase total revenue.
False.
For price inelastic demand, lowering the price leads to a fall in total revenue, while raising it increases revenue.
Why is knowing the PED of its products useful for a business's pricing decisions?
It helps the business predict the effect of a price change on sales volume and revenue, so it can adjust its pricing to maximise revenue.
Define income elasticity of demand.
Income elasticity of demand (YED) measures how responsive the quantity demanded of a product is to a change in consumer income.
YED = % change in quantity demanded ÷ % change in income
Define inferior good.
An inferior good is a good where demand falls when income increases, such as instant noodles or bus travel.
What type of good has a YED greater than 1?
A YED greater than 1 indicates a luxury good, as demand is responsive to a change in income (income elastic).
A good with a YED between 0 and 1 is a _______ good, as demand is not very responsive to a change in income.
A good with a YED between 0 and 1 is a necessity good, as demand is not very responsive to a change in income.
True or False?
Necessities and luxuries are both normal goods.
True.
A positive YED means a normal good, and normal goods can be classified as necessities or luxuries.
Why must businesses selling luxury goods plan carefully for the economic cycle?
Strong growth in a boom can be followed by sharp falls in demand in a recession.
How are businesses selling necessities affected by economic downturns?
They enjoy more stable, predictable demand and are less exposed to economic downturns.
Other influences on income, and so on demand, include minimum wage legislation, ______ and increased international trade.
Other influences on income, and so on demand, include minimum wage legislation, taxation and increased international trade.
What challenge may businesses selling inferior goods face when incomes recover?
They may need to adapt their strategy, as customers may switch to premium alternatives.
Incomes rise by 3% and demand for a product rises by 9.09%. What is its YED?
YED = 9.09% ÷ 3% = +3.03, so the product is a luxury good.
How does understanding YED help a business to plan?
It helps forecast how demand will change as the economy grows or contracts, so the business can set production targets and decide when to invest in new capacity or cut costs.
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