Edexcel A-Level Economics B 2.2 Firms, Consumers And Elasticities Of Demand

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Price elasticity of demand

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A measure of the response of quantity demanded to changes in price.

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Perfectly price inelastic

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A PED of 0 - price changes have no effect on quantity demanded.

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Price inelastic

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A PED between 0 and -1 - quantity demanded changes by a smaller percentage than price.

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Unit price elasticity

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A PED of -1 - quantity demanded changes by the same percentage as price.

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Price elastic

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A PED between -1 and infinity - quantity demanded changes by a larger percentage than price.

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Perfectly price elastic

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A PED of infinity - a price cut causes demand to fall to zero, whilst a price cut leads to more demand than the firm can cope with.

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Competitive pricing

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In a highly competitive market with many substitutes, there will be a 'going price' - competitive pricing means setting the price very close to that.

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Cost plus pricing

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Based on an assessment of costs, topped up by a percentage for profit. For example, a business wanting to make 20% profit with an average cost of £10 per unit would set the price at £12.

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Price skimming

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Charging a very high initial price for a product whilst it is still relatively unique in the market, with a view to lowering it later.

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Penetration pricing

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A lower 'introductory' price than the competition is set to entice consumers to give a product a try, rather than buying their regular brand, increasing brand recognition. When sales have increased, the business will raise the price to a more profitable level.

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Predatory pricing

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A tactic used by a dominant business either to eliminate a rival, or to prevent it from taking market share. It involves setting very low prices, perhaps below the costs of production, until it 'destroys' the competition. Once the competitor leaves the market, prices can be increased again.

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Psychological pricing

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Persuading consumers with a 'charm' price which suggests better value, typically one penny below the pound.

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Product differentiation

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Firms competing by making a product or service different from its rival in ways that attract consumers.

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Brand loyalty

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Arises from distinctive features that gives the product some uniqueness and attract customers to make repeat purchases, regularly choosing the product in preference to those of competitors.

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Informative advertising

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Advertising designed to alert potential customers to product features. This is important when there are specific technical qualities that may be attractive.

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Persuasive advertising

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Advertising influencing the customer by engaging their emotions.

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Product placement

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Branded products that are made easily visible in a TV programme or film, or mentioned in a book. Public relations experts may used it as advertising.

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Sales offers

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Using short-term techniques to encourage customers to buy. They can include money-off coupons, buy one get one free offers, discounts, free samples and special offers (this is an example of psychological pricing).

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Direct sales

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Involving direct contact with the potential customer, which can be door-to-door but is often done by phone.

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Public relations

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Involves liaising with the press and media, offering information about the company. Many businesses have PR departments or use an agency to promote products by getting positive media mentions into circulation.

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Big data

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High-volume, high-velocity and high-variety information that combines with cost-effective, innovative information processing for better insight and decision making.

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Marketing mix

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A combination of factors that can be controlled by a company to influence consumers to purchase its products - typically product, price, promotion and place (distribution).

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Income elasticity of demand (YED)

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A measure of how much quantity demanded will change when income changes.

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Income elastic

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A YED greater than 1 - an income change causes a proportionately bigger change in demand.

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Unitary income elasticity

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A YED of 1 - an income change causes the same proportional change in demand.

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Income inelastic

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A YED between 0 and 1 - an income change causes a proportionately smaller change in quantity demanded.

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Normal goods

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For most products and services, quantity demanded rises as incomes rise and vice versa - they have a positive YED value.

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Inferior goods

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Products and services that see quantity demanded fall as incomes rise, and vice versa. They have a negative YED value.

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Recession

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Two quarters of falling output in the economy as a whole. Most recessions involve a longer period of very slow growth after that.

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Boom conditions

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When incomes are rising strongly across the economy.