AS
Business Studies
The Market

What is demand?
The quantity of a product that consumers are willing and able to buy and different prices in a specific time period.
What is effective demand?
For demand to be effective desire must be backed by willingness and ability to pay.
What is the link between demand and price?
There is a link between demand and price. As prices rise demand falls and as prices fall demand rises.

What factors affect demand?
Income: as income rises more people will demand goods as they have more disposable income
Interest rates: as interest rates rise then the willingness/ability to purchase goods may decrease
Mortgage rate: For those people repaying a mortgage, any rise in the rate charged will reduce the amount of income available for other forms of spending.
Demographic changes: the size of the population/target market
Consumer tastes and preferences: Some items may not be demanded any more as they are going out of fashion.
The price of rival goods: if rival goods prices increase demand for your item will increase and vice versa.
The price of complementary goods: if the price of complimentary goods falls then it will boost demand for your product.
What are substitutes and compliments?
Substitute: Rival goods which perform the same or similar tasks. Tea versus coffee, cars versus public transport. A rise in the price for one will lead to an increase in demand for the other.
Compliment: Go with each other. The full benefit for one good requires the other. TV/Electricity DVD/DVD player. A rise in the price of one will discourage the consumption or purchase of another.

A rise in demand
More is demanded at each price. There may be several causes for this.
Rise in income
Reduction in income tax
Rise in population size
Successful advertising campaign
Cut in the price of complimentary goods

A fall in demand
Less is demanded at each price. Causes of this may be:
Fall in income
Rise in income tax
Rise in the price of a complimentary good
Fall in the price of a rival product

Price elasticity of demand
This refers to the extent to which buyers are price sensitive – does a price rise bring about a substantial contraction in demand or just a small one?
If demand is price elastic then a change in price generates a proportionately larger change in quantity demanded.
If demand is price inelastic then a change in price produces a proportionately smaller change in the quantity demanded.

What is supply?
Supply refers to the quantity that suppliers are willing and able to offer for sale at different prices during a specified period of time.

Reasons for a change in the supply curve.
Change in technology
The cost of factor resources used in production
The prices of related goods
Government taxes and subsidies

Anything which increases the price of production will reduce the profitability of supply goods and therefore will reduce supply.
Anything which reduces costs of production will increase supply.
A change in price brings a movement along the curve.

Equilibrium price
Equilibrium occurs when the quantity supplied equals quantity demanded.
At the price at which the quantity suppliers wish to sell exactly equals to the quantity buyers wish to buy.
If price is above equilibrium:
The amount supplied will be greater than the amount demanded
As a result there will be a surplus which drives down the price
If price is below equilibrium:
The amount demanded will be greater than the amount supplied
As a result there will be a shortage which drives up price

Other influences
Technological change
Technology includes a wide range of innovations that enable a business to produce goods of a higher quality and in a more efficient manner.
Primary Sector: Involves