What is demand?
- demand is the number of goods and services that people are willing and able to buy at each price
What is the relationship between price and demand?
- downward sloping (inverse relationship)
- at higher prices, quantity demanded is lower because goods and services are less affordable so less people are willing and able to buy
Non-price factors that shift the demand curve
- PIRATES
- Population
- Incomes
- Related goods (complements or substitutes)
- Advertising
- Trends (new fashion etc.)
- Expectations (toilet roll during covid)
- Seasons (ice cream/ holiday packages)
What is supply?
- supply is the number of goods and services that firms are willing and able to sell at each price
What is the relationship between price and supply?
- upward sloping (positive relationship)
- at higher prices, quantity supplied is higher because there is a greater incentive for firms to sell due to the potential to make higher profits
Non-price factors that shift the demand curve
- PCTWINS
- Productivity
- Costs of production
- Technology
- Weather
- Indirect tax
- Number of firms
- Subsidies
What is elasticity?
- responsiveness
- 0 - perfectly inelastic
- 1 or -1 - unit elastic
- infinity - perfectly elasticE
What is PED?
- price elasticity of demand
- the responsiveness of demand to a change in price
- PED = % change in D/ % change in P
What is PES?
- price elasticity of supply
- the responsiveness of supply to a change in price
- PES = % change in S/ % change in P
What is YED?
- income elasticity of demand
- the responsiveness of income to a change in price
- PED = % change in Y/ % change in P
What is XED?
- cross elasticity of demand
- the responsiveness of demand of one good, to a change in price of a different good
- PED = % change in D of good A/ % change in P of good B
Factors that affect PED
- SANDPIT
- S - number of substitutes
- A - addictiveness (cigarettes)
- N- necessity (electricity/ energy bills)
- D - durability (sofa)
- P - proportion of income (inelastic if it is something that is £1 increases by 50% to £1.50, elastic if it is something that increases by 50% from £1000 to £1500)
- I
- T - time (over time, the other factors change e.g. people get used to substitutes over time)
Factors that affect PES
- SECTS
- S - substitutability of factors
- E - barriers to entry
- C - spare capacity
- T - time
- S - stock level
Factors that affect YED
- inferior goods - YED < 0
- normal goods - 0 < YED < 1
- luxury goods - YED > 1
Factors that affect XED
- strong complements - XED < -1
- weak complements - -1 < XED < 0
- unrelated goods - XED = 0
- weak substitutes - 0 < XED < 1
- strong substitutes - XED > 1