Supply and Demand Review
Ability to reproduce the model and indicate the flow of money and labor
* have to make a product in order to make a profit in order to buy a product later *
4 Ps in the Marketing Mix
- Product - Price - Place - Promotion
4 ways the marketing mix evolves over time
- the product portfolio may grow as a business becomes more established - More expensive promotional activities may be adopted as a firm's revenue increases - More outlets may be opened, or products sold via the internet - Price may increase as demand grows
5 promotional activities
1) Advertising - TV, Movies, billboards and internet 2) Sales promotions - Loyalty cards, BOGOF, discounts, and free gifts 3) Sponsorships - a business pays to be associated with another firm, event or cause 4) Direct mailing - promotional material is sent to potential customers by post / email 5) Public relations - building the relationship between the firm and the public by enhancing its reputation
4 aims of promotion
1) Raise awarness 2) Encourage sales 3) Create or change a brand image 4) Maintain market share
3 Reasons why the marketing mix is important
1) Reach a target demographic or a group of people who are most likely to buy your product 2) Expand the appeal of your product locally, nationally, and internationally 3) Meet changing customer demands
5 pricing strategies for marketing
1) Skimming - launching with a high price when there is little competition, then reducing the price later. (often used with technology) 2) Penetration - low price charged initially to penetrate the market and build brand loyalty; price is then increased. (example - introductory offers on magazines) 3) Competitive - a similar price is charged to that of competitors' products. 4) Loss leader - products may be sold at a price lower than the cost to produce it. Often used by supermarkets to encourage people into the stores where it is hoped they will buy other products. 5) Psychological - a price is set which customers perceive as lower than it is (example - 39.99 instead of 40.00)
What are the components of the Circular Flow Model?
1. Households 2. Markets for goods and services 3. Firms 4. Markets for factors of production
Positive Externally
A benefit that is enjoyed by a 3rd party result of an economic transaction. 3rd parties include - any individual, organization, property owner, or resource that is indirectly affected. ex - a child is vacinated against measles keeping other children safe from getting sick.
The role of demographic surveys and questionnaires in creating demand for a product, Two important roles.
Companies use demographic studies and surveys to 1) Get information about consumer demands and create ways to increase demand for their product 2) Target specific groups of customers
How to determine if a good produced is Elastic or In elastic
Elastic if - the good is a luxury - the longer the time period that the good is sold - the larger the number of close substitutes for that good - the more narrowly defined the market ( not a lot of buyers or sellers ) Inelastic if - the good is a necessity - the time period that the good is sold is shorter - the smaller the number of close substitutes for that good - the more broadly defined the market ( many buyers or sellers)
Why elasticity can be helpful to a business
Elasticity helps businesses to model what would happen to the demand for a good if the price changes or other factors that could affect demand change such as the weather season
High Elasticity and Why is it bad?
High elasticity is bad for a product because it means the demand for that product can go up or down quickly due to things that may be out of the businesses control Elasticity is usually measured in terms of if the measured elasticity is one or greater than 1 Ex - Luxury vacation cruise becasue not a lot of people can affort a cruuise that is expensive and there are a lot of different cruise packages to choose from
What occurs at each part of the Circular Flow Model?
Households - Buy and consume goods and services / Own and sell factors of production Markets for goods and services - Firms sell / Households buy Firms / Business - Produce and sell goods and services / Hire and use factors of production Markets for factors of production - Households sell / Firms buy
In-elasticity
If demand elasticity is less than 1 it means that the demand for that product will be inelastic or not affected by other factors. (demand for the product will be steady and will not change quickly) ex - gas becasue you need it to drive and there are still not a lot of close substitutes and it wont stay at the same price for a long time period
What type of economic system will the Circular Flow Model work for?
Market
The relationship between Market Demand and Individual Demand
Market demand = sum of individual demand
The relationship between Market Supply and Individual Supply
Market supply = Sum of individual supply
Why the demand curve slopes down
One reason the demand curve slopes downward is due to diminishing marginal utility To make a buying decision, we consider whether the satisfaction we expect to gain is worth the money we must give up Starts at the top of x-axis and slopes downward toward the y-axis
Positive Externally Government
One role for government is to implement economic policies that promote positive externalities. There are two general approaches to promoting positive externalities; to increase the supply of. and demand for goods, services, and resources that generate external benefits. The government does this through creating a subsidy. Subsidy - helps control supply and demand by encouraging people to buy a product because the government is helping to reduce the price of that product.
Price ceiling and price floor
Price ceiling - a legal maximum that can be charged for a good - Can create shortages of a product that can either help or harm consumers - common examples include: apartment rentals and credit card interest rates Price floor - a legal minimum that can be charged for a good - can result in a surplus of a product - common examples include: soybeans, milk, minimum wage
The difference between a price leader and price taker
Price leader - businesses that dominate the market can often dictate the price charged for a product, other businesses follow this lead Price taker - businesses have to charge the market price, this is often the case where there are many small firms competing against each other
Price of elasticity of Demand and the formula used to measure the price elasticity of demand
Price of elasticity of demand is the percentage in quantity demanded given a percent change in the price, it is a measure of how much the quantity demanded of good responds Formula = Percentage change in quantity demand / Percentage change in prices
The difference between quantity demand and demand
Quantity demand - the amount of good that buyers are willing and able to purchase Demand - the relationship between demand and price (a full description of how the quantity demanded changes as the price of the goods changes)
The difference between quantity supplied and supply
Quantity supplied - the amount of a good that sellers are willing and able to sell Supply - the relationship between supply and price (a full description between how the quantity supplied of a commodity responds to a change in its price)
The difference between shifting the demand curve and moving up and down the demand curve
Shifting the demand curve - Changing price and quantity demanded at the same time will cause a shift of the demand curve because you are changing both of the variables involved in the demand graph Moving along the curve - Changing price or changing quantity demanded by itself will only allow you to move up or down the demand curve instead of shifting it because you are only changing one variable on the demand graph
Factors that influence the demand curve and shift the demand curve (left / right)
The demand curve can shift left if there is a decrease in demand and can shift right if there is an increase in demand Factors that influence the demand curve Shift Right (increase in demand) - Population increases (more opportunity to buy/sell) - Increase in people's income (more money to buy stuff) - Price of substitute increases (similar product) - Price of complementary good decreases (you would choose 1 product over the other) - Product becomes a popular fad (people will want popular items) Shift Left (decrease in demand) - Population decreases (less opportunity to buy/sell) - Decrease in people's income (less money to buy stuff) - Price of substitute decreases (similar product) - Price of complementary good increases (you would choose 1 product over the other) - Product now out of fashion (people won't want unpopular items) - Expectation price of product will soon fall (wait until the price drops) There is fear that the economy will go into a recession where many firms will fail and unemployment will increase, will demand increase or decrease? - if economic disaster, demand will decrease because people will save up their money. - if natural disaster, demand will increase because people will stick up on materials
Two ways the government stops monopolies
The government gets involved in the supply and demand markets for the following reasons - prevent monopolies - protect consumer rights The government gets involved through setting a price setting, a price ceiling and a price floor examples historic example - president teddy attempts to break up the steel/oil monopolies current example - U.S government intervening to stop phone companies from merging ( t-mobile and AT&T )
Equilibrium in terms of supply and demand
The price will automatically reach a level at which the quantity demand equals the quantity supplied
Law of Demand
The quantity of a good falls when the price of the good rises and vice versa, provided all other factors that affect buyers' decisions are unchanged
Law of Supply
The quantity supplied of a good rises when the price of a good rises as long as all other factors are unchanged.
Why the supply curve slopes upward
The reason the supply curve slopes upward is due to costs and profit, as the price increases suppliers are willing to produce more of the good, meaning more profit if the price is low, suppliers will be willing to produce less meaning less profit. Starts at bottom of x-axis and slopes up toward top of the y-axis
Factors that influence the supply curve and shift the supply curve (left / right)
The supply curve can be shifted left if there is a decrease in supply and shift right if there is an increase in supply Factors that influence the supply curve Shift right(increase in supply) - A decrease in the price of inputs (make more products efficiently) - An increase in the number of firms in the industry (more people producing product) - Decrease in taxes (cost you less to sell product) - Technology development (can make a product more efficiently / less human error) Shift Left(decrease in supply) - An increase in the price of inputs (make fewer products due to inefficiency) - Decrease in the number of firms in the industry (fewer people producing product) - Increase in taxes (cost more to sell product)
Perfect competition when it comes to supply/demand markets and what three conditions does it assume?
The theory of supply and demand assumes that commodities are traded in perfectly competitive markets Perfectly competitive market is a market in which - there are many buyers - there are many sellers - all sellers sell the exact same product As a result, each buyer and seller have a negligible impact on the market price example - iPhone - if one phone seller stops selling a product, it won't affect the price of iPhone - if one does not buy the phone, it won't affect the price example - metra - if one person does not buy a metra ticket for a cubs rally, it won't affect the price of that ticket - if one metra conductor cannot sell tickets, it wont affect the price of the ticket
Employment in relation to supply and demand
Unemployment - a failure of equilibrium when the wage is too high and stuck
Surplus in supply and demand
When price exceeds equilibrium price then quantity supplied is greater than quantity demanded Suppliers will lower the price to increase sales, thereby moving toward equilibrium Price will decrease
Shortage in supply and demand
When price is less than equilibrium price, then quantity demanded exceeds the quantity supplied Suppliers will raise the price due to too many buyers chasing too few goods thereby moving toward equilibrium Price will increase
Elasiticity
a measure of how much buyers and sellers respond to changes in market conditions, also allows us to analyze supply and demand with greater precision *central question - what affects demand for my product?* - multiple/unlimited factors can affect the demand for a product *price is the most important factor that affects elasticity / demand for good* *demand elasticity - helps estimate potential demand of good* ex - if more and more factors are pulling on the rubber band, it'll eventually snap
