3 The Market Flashcards
Demand factors
Price, prices of substitute goods, changes in consumer incomes, fashion, tastes and preferences, advertising and branding, demographics, external shocks, Seasonality
Demand factors: price
Higher prices lead to a lower effective demand, since fewer customers kind of 40p. Higher prices make alternative seem better value. On the other hand, prices give us a signal about the product being sold – so lower prices may damage consumer perception of quality
Demand factors: substitute and complimentary goods
For example the price of a tin of Roses falls, demand for quality street will fall as consumers switch to buying the cheaper substitute. Similarly the price of substitute rises, demand for quality street will increase.
For complimentary products, if the complimentary products rise, demand for the original product is likely to fall. Often complimentary products can represent the running costs of another product, such as petrol for cars, or coffee capsules or coffee machines. If the price of the complimentary product rises demand for the original will fall. and vice versa
Demand factors: changes in consumer incomes
As income rises, demand for products rises, as consumers have more income to spend. The luxury goods such as Porsche cars, demand will rise even faster than incomes. Of course, income does not always rise. As economies go through recsssion, incomes were full, and feel normal and luxury goods, demand falls as consumers trying to save money. However, some products known as inferior goods see demand rise in income falls, Poundland. Inferior goods, tend to be cheaper alternatives to normal goods, which consumers can switch to in order to save money when the income is falling. As incomes rise again, consumers will switch back to normal and luxury goods, leading to a fall in demand for inferior goods.
Demand factors: fashion, tastes and preferences
Change over time, factors such as attitudes to diet change unpredictably but can have a major impact upon demand for products, either positive or negative.
Demand factors: advertising and branding
Successful advertising leads to major short-term increases in demand. Consistent advertising linked to other marketing activity may help to build a brand. Therefore protecting it from direct competitors and making sales volume relatively stable.
Demand factors: demographics
Changes in the make up of populations, can affect demand for individual products. Major demographics trends in the UK in recent years have seen a growing population for over 60s, a rising birthrate an increased number of European migrants. All these groups provide opportunities for increased demand for carefully targeted products.
Demand factors: external shocks
Natural disasters, changes in the law, unexpected traffic problems, a major customer not renewing a contract are all examples of events that can have a hugely damaging impact on demand for small or large businesses. The major problem with many external shocks is their unpredictability. They are outside the business’s control
Demand factors: seasonality
Seasonal factors affect demand for many products, whether they are related to the weather and natures seasons or due to special events during the course of a year, such as Christmas.
Supply factors
Changes in costs of production, introduction of new technology, indirect taxes, government subsides, external shocks
Supply factors: changes in cost of production
If the costs of making a product changes, the amount that a business is willing to supply will adjust accordingly:
- If production costs rise, the amount supplied will fall,
- If production costs fall, the amount supplied will rise
Supply factors: introduction of new technology
New technology used in production, such as industrial robots, tend to reduce the cost of production:
- The introduction of new technology should lead to an increase in supply
- Firms willing to supply more than lower production costs offering higher profits
Supply factors: indirect taxes
Indirect taxes act just like another component of the cost of producing a product or service:
- An increase in indirect tax rates will increase costs and therefore reduce supply
- A decrease in indirect tax rates will cut total cost and therefore increase supply
Supply factors: government subsides
Opposite of taxes. When the government wants to encourage the supply of a product such as wind powered energy, it may offer subsides to businesses. This cuts the cost of production faced by the business, meaning that subsides will increase supply.
Supply factors: external shocks
Unexpected events such as economic crisis, poor harvest, natural disasters can reduce the total quantity of an item available. This would lead to an increase in the price of an item, meaning the production costs rise and firms reduce the amount they are willing to supply.
