1.1, 1.2, 1.4, 1.5 Flashcards
what are the 7 factors leading to a change in demand?
- changes in the prices of substitutes and complementary goods
- change in consumer incomes
- fashion, tastes and preferences
- advertising and branding
- demographics
- external shocks
- seasonal factors
explain ‘changes in the prices of substitutes and complementary goods’ for a change in demand
- if the price of substitutes go down it could lead to a decrease in demand for your product
- if the price set by the software producers for the PS4 games goes up it would have an effect on hardware. some would still to PS3 or change products. the software and hardware are complementary goods and so sales of one have a positive effect on sales of the other
explain ‘changes in consumer incomes’ for a change in demand
- the demand for most products and services grows as the economy grows. goods like cars and cinema tickets are normal goods so demand lines with income
- inferior goods see sales falling when people are better off, e.g. Tesco value products
explain ‘fashion, tastes and preferences’ for a change in demand
- Fashion is very difficult to manage as by definition what goes up must come down. Very few brands stay in fashion forever. Yet some brands such as Chanel and Nike do seem to be eternally fashionable.
- Consumer tastes and preferences can be fickle but generally, there is a core of stability that helps companies feel confident about ongoing demand. An example is the demand for gym membership. Yes, it may suffer during a recession but the ongoing consumer preference for this expenditure has been proven over the decades.
explain ‘advertising and branding’ for a change in demand
- Those who do the most advertising are much more likely to suffer higher demand due to the increased awareness of the product.
- In the long run, branding is more important than advertising as if the brand is one that the customer finds memorable and can identify with then the payback will be huge. The value of a brand is its ability to command a higher price for products and to achieve high levels of customer loyalty.
explain ‘demographics’ for a change in demand
- The top two yoghurt brands are focused on children and so these demographically based brands transformed demand in the yoghurt market. In the 1970’s, the market consisted solely of plain, unsweetened yoghurt in glass jars.
- Today the most exciting area for demographic opportunity is old people. There is a large growth projected to happen in this age bracket as life expectancy rises. This could lead to many businesses adapting their products to suit the demographic change, thus leading to higher demand.
explain ‘external shocks’ to a change in demand
- in May 1996, the EU banned all exports of beef from the UK due to the fear of ‘mad cow disease’, lifted after 10 years and led to a collapse in the market price of beef in the UK due to the very low demand
- Lots of businesses will face external shocks on a fairly regular system. For example, if there is a train line down or there is a blocked road due to works it will lead to the nearby shops receiving much less demand
- Further external shocks include natural disasters, a change in law and an unexpected change of mind by a major customer or supplier
explain ‘seasonal factors’ for a change in demand
- Some markets such as ice cream, soft drinks and seaside hotels boom in the summer and slump in the winter whilst markets such as sales of perfume, liquors and greeting cards boom at Christmas.
- Those with less obvious seasonal variations in demand include cars, TVs and newspapers. The variation is caused by patterns of customer behaviour and nothing can be done.
- A well-run business makes sure it understands and predicts the seasonal variations in demand to then form a plan for coping
what are the two demand risks?
1) undiversified demand
- a business must try to diversify, spreading the risk by fining new sources of demand and therefore being less reliant upon any single source
2) overtrading
- sometimes small business grow so quickly that they struggle to generate enough cash to meet rising bills due to rising production levels
- Meeting next month’s higher demand levels requires extra cash spent today, creating a strain on the firm’s cash position
what is supply?
the quantity of a product that producers are able to deliver within a specific time period.
what is the profit-maximising point?
where firms supply at the level that makes as high a profile as possible
what are the 5 factors leading to a change in supply?
- changes in the costs of production
- introduction of new technology
- indirect taxes
- government subsidies
- external shocks
explain ‘changes in the cost of production’ on supply
- These include the cost of materials, rent, fuel, salaries and advertising
- The higher the costs, the lower the incentive to supply due to the lower profits. However, if all your competitors face the same cost increases you may not worry. You can assume that if everyone puts their price up then market share figures should remain unchanged.
explain ‘introduction of new technology’ on supply
- This can have a significant effect on production costs and efficiencies.
- A big increase in the supply of robots can lower production costs and also help to boost production capacity. Therefore, supply is not only cheaper but also more plentiful.
explain ‘indirect taxes’ on supply
- These are taxes levied by government onto goods and services. The most common one is the 20% rate of VAT put onto most goods and services.
- If the government decided to increase the duty on petrol, this would add to the cost of supply. Therefore, oil companies would wish to supply less petrol to the market and therefore would push the price up.
