1.3.1 Demand

Demand – the quantity of a good or service that people are willing and able to buy at a given price, at a given time.

Market demand – the sum of all individual demands for a particular good or service.

Effective demand – the intent of people who want to buy a product and have the means. Demand comes from the individual consumers of goods and services, and assuming that they are rational, they maximise their satisfaction.

There is an inverse relationship between price and quantity demanded, which means as price goes up, quantity demanded goes down, which is shown by the demand curve.

A change in the price causes a movement along the demand curve.
A shift in the demand curve is caused by any factor other than price.

FACTORS THAT AFFECT DEMAND

o Substitutes are goods that can be consumed in place of another, if the price of the

original good goes up then sales of the substitute will rise, shifting the demand curve

to the right.
oComplements are products that will usually be consumed together, if a good

increases in price, then its complement will have the demand curve move to the left

and vice versa.
oTastes/fashions and how they change. Preferences for a certain good over time will

cause demand for that good to change can move the demand curve: to the right with

an increase in demand and vice versa.
o Changes in real inincomes also affect demand, usually as income increases quantity

demanded for most products go up and vice versa, these are known as normal goods. Some goods work in the opposite way, they are inferior goods and are usually cheaper substitutes which are usually chosen when incomes fall.

o Changes in the demographic (size and age distribution of the population) as population increases or decreases, so does demand for most products and as the structure of the population changes so will increase demand for certain products, e.g. if there is an aging population then demand for care homes will increase.

o Advertising is meant to cause people to buy more and is intended to shift the demand curve to the right, which works similarly to branding which works by reinforcing and increasing knowledge of the brand.

These can be remembered by the following acronym:

CATSID
Complements Advertising Tastes/fashions Substitutes Incomes Demographic

1.3.2 Supply

Supply – the amount of a good or service that producers are willing and able to provide, at a given price, at a given time.
Individual supply – supply of a single producer of a certain good or service.
Market supply – the total output of all individual suppliers of a particular good or service. Law of supply  the higher the price paid, the more is supplied (more profit).

There is a direct relationship between quantity supplied and the price, so as the price increases, so does the quantity supplied.

A change in the price causes a movement along the supply curve.

A shift in the supply curve is caused by any factor other than price.

FACTORS THAT AFFECT SUPPLY

o Changes in the cost ofraw materials, which increase the costs of production and

shifts the supply curve upwards and to the left. This is because as profits decrease,

suppliers are less willing to make products as it is less profitable.
o Changes in thewages paid to staff also add to the costs of production which also

moves the supply curve to the left.
o Changes in theclimatic conditions which affect the production of the goods/services

can reduce or increase supplies depending on the weather conditions causing les raw

materials to be available etc.
o The number ofnew firms that join the market changes the output of the market, as

more firms produce the good/service, it will shift the supply curve to the right. As an industry shrinks the supply curve shifts to the left, both of which are long-term changes.

o Indirect taxes also affect the supply curve as if the government intervenes, it is often to cut consumption and/or raise (government) revenue. An increase on the tax on a product shifts to the left and in effect increases the costs for the producer, which they may pass on to consumer.

o The introduction of new technology allows the firms to produce a given item at a lower price and cut costs of production.

o Subsidies are payments made to a producer by the government in order to encourage production as it lowers their cost of production and makes them more willing and able to produce more.

These can be remembered using the following phrase:

RED WINE CAN NEVER TASTE TOO STRONG

Raw materials Wages Climate conditions New firms Tax Technology Subsidies

Why does the supply curve slope upwards?

• High prices encourage new firms to enter the market because it seems profitable, so total supply increases.

• With larger outputs, firm’s costs increase so they need to charge a higher price to cover the costs.

1.3.3 Price determination
When the demand and supply curves are brought together on the same diagram, there is a

point at which the curves cross each other. This is known as equilibrium.

Equilibrium – the point at which consumers will demand the exact amount that is supplied. All that is produced by suppliers is bought by consumers.

There will be no unsold goods and we say that the market clears as surpluses and shortages are eroded away which allows them to arrive at a equilibrium price at which market clearing occurs.

Equilibrium price – the price at which there are no shortages or surpluses.

The ideal or market price occurs at the intersection of demand and supply.

The interaction of supply and demand determines the prices and quantities of the economy’s goods and services.

In market economies prices are the signals that guide allocation of resources for suppliers.

When there is excess demand, there is a shortage of that particular good/service.

This occurs when demand is higher than supply.

The price needs to be increased, causing the demand to lower as not everyone can afford a higher price until a new equilibrium is reached

When there is excess supply, there is a surplus of that particular good/service.

This occurs when supply is higher than demand.

The price needs to be decreased so that more people are willing to buy a cheaper product, and this happens until a new equilibrium is reached.

THE LIMITATIONS OF DEMANDAND SUPPLY DIAGRAMS

o Diagrams only show what happens in certain markets e.g. in competitive markets where there are many buyers.

o It assumes that when making economic decisions, that business have complete knowledge whereas in real life this is often not the case.

o Some markets/products do not reduce in demand if the prices increase e.g. designer clothes/ticket prices.

o There is an assumption that if price falls, demand increases which is not always the case in real life.

o Brand loyalty is a factor which is not taken into account.
o Supply curves assume that as prices rise, suppliers will produce more which is not

always the case as suppliers may not have sufficient resources to do so.
o Consumers are not always rational e.g. despite the fact that products are cheaper

after Christmas, consumers still buy before Christmas when prices are high.

CETERIS PARIBUS (all other things being equal)

• When we look at supply in the market, we assume demand stays the same.

• Demand and supply might change at the same time which diagrams do not take into

  account.

1.3.4 The Price Mechanism

The price mechanism is an automatic process to bring market into equilibrium.

Eg: Oil becomes scarce, the Price mechanism allows alternatives to be found.

1.3.4 a) Role of Pricing:

Rationing

→ Prices help to ration demand

→If something is too expensive, we are reluctant to buy it.

→ Stops demand outstripping supply

Gives incentives

→ Consumers have cheaper noises to motivate us to buy

→Firms have higher prices, motivate them to supply (profit)

Signalling

→Prices help to attract new firms to the the market where resources are needed

→Invisible hand

→Can deter them from the market where prices are lower+Resources aren’t needed

Eg: Blockbuster Video→Pizza Bar

Examples in the real world:

Rational→ Higher prices for premium quality and specialty coffee indicates the precedes of the rationing function.

Incentive→ High prices act as an incentive to produce in other markets to leave those markets and move to those with higher prices, because of the products that can be made Eg. Smartphones

Signalling→High Prices attract to producer to the market → Profit incentive

1.3.4 b) How firms respond to a change in Demand

• Rising prices→Rising Demand→Firms INCREASE output and so increases profit margin

• Falling prices→Falling demand→So firms should cut prices and reduce output or come up with new products.

1.3.4 c) Niche and Mass Market

Mass Market→A large market with a high sales volume. Tends to be a standardised product Eg; Cadbury Diary Milk

Niche Market→Small segment of a bigger market Eg: Organic Food or Gothic Clothing

Low Competition→A higher price can be charged→Increased profit

1.3.4 d) Potential Market Growth

Market Size→The total sales volume of a given market

Market Growth→Increase in demand for a product due to rising incomes/population, better substitutes or the product becomes cheaper

Dynamic Market→Changing and evolving all the time

Static Markets→Little Change

New Technologies→Cheaper or Better Products→Increased Sales and Profit→Business invest in research and process innovation.

Market Change→Not static (some grow, some shrink)

-Factors that affect the market: Technology + Consumer tastes

Creative Destruction

New technologies are developed→New products are created and demand grows → Increased sales and more jobs created→ Over time better substitutes are created so consumers switch to these→ Jobs are now lost the declining industry.

When new innovative products cause the destruction of others.

Market Share→The percentage of a market’s total sales that a particular business has.

(Individual business sales/ Total Market Sales) x 100

1.3.5 Understanding the consumer

What is market research?

Gathering and analysing market research.

Eg:

-Finding out consumer preferences

-Who is your target market?

-Style of packaging preferred

-Frequency of purchase?

-Is there a need or want?

-Competitors?

-Price?

1.3.5 (a)

Primary Market Research (Field Research)

First Hand Info→Collected by the business itself or a specialist agency on behalf of the business (New Data)

• Surveys→ Based on questions but also involve the process of collecting and analysing the participant responses. (ANALYSE)

Eg. Online surveys + Postal Survey + Focus Group + Interviews + Test Marketing

• Questionnaire→ Written set of questions aimed at collecting information about individuals. (GATHER INFORMATION)

• Observations→Watching customers’ routes taken around the store and aiming to spot patterns and trends.

• Test Marketing→Trialing product with customers before launch→Gain real date

Benefits of Primary Market Research:

→Focused Eg: Interview or Focused Group

→Detailed insights Eg: Does a display/Promotion increase sales

→Up to date

Drawbacks of Primary Market Research:

→Time Consuming=

→Costly

→Bias view might not represent the population

→Not available to other competitors

Secondary Research (Desk Research)

Research that had previously been carried out for a different purpose.

• Government Statistics (Free) → Census (Survey of households in the UK every 10 years)

• National Statistics→Shows spending on products over time.

• Market Research reports→ Carried out by market companies → Expensive but specific

• Trade Publications produce specialist market reports

• Digital Sales Data→From Debit Card Sales

Benefits of Secondary Market Research:

→Often free and easy to obtain

→Good source of market insights

→Quick to access and use

Drawbacks of Secondary Market Research:

→Can quickly become out of date

→Not always tailored to specific research needs

→Specific reports often quite expensive

Types of Information:

QuaNtitative Information→Market Research that gives numerical results and so can be analysed statistically (yes/no) N→Numerical

• Easy to analyse

• Large sample

• Limited info (Don’t know why)

Qualitative Information → Market Research giving results are based on opinions and feelings (more in-depth) Eg: How does this advert make you feel? (Personal opinions)

• More difficult to analyse

• In-depth Info

Sampling

To gather market research, a representative group is chosen to survey.

Idea→This will represent the whole population

Types:

Random Sampling→ Everyone has an equal chance of participation

Eg: Electoral Register → Every 100th name→Send to post address

Hard to obtain a random samples

Quota Sample→A sample is chosen that reflects the distribution of different groups in society

Eg: 20% of population is between 20-30, so if doing a 1000 surveys, 20% will be in that age group

Takes longer

More difficult

More Specific

Stratified Sampling→A selection of people are randomly chosen within a set-group

Sub-group was known as' ‘strata’.

Eg: students aged 18-22

1.3.5 (b)

Limitations of Market Research

Blind Tests

Eg: As part of a taste test can give very inaccurate results→Ignore brand loyalty

Eg: Coca Cola Taste Tests

Smaller samples of Research may have bias and not represent views of the whole population.

Survey Questions may not be easily understood or may only be quantitative

Some markets change very quickly Eg: Technology Products

So market research can quickly be understood

Difficult and costly to obtain for small business.

1.3.5 (c)

Market Segmentation

As different buyers require different products and marketing approaches, businesses can target each segment by adapting products and advertising to best suit/fit each segment.

How to segment/split the market

Age, Gender, socio-economic group, geographical area, religion, ethnicity, education level, hobbies, family size.

Age→Clothing shops

Eg: Next→Older

Zara→ Younger

Income Group→Cars

Eg: Citroen→Lower Income

Porsche→Higher income

Family Size→Cars

Eg: Estate Cars→Larger families

Smarter Cars→1/2 People

Geographic Area

Clothing→Coats/Scarves/Kilts→Scotland

Cars→Country (4x4)

Benefits of Segmentation:

More precisely a segment can identified→More likely to create sales

Particular products are targeted at particular people→Less hate of resources+time

Encourages development of brand loyalty and so can develop USP to suit specific buyers

Helps select appropriate pricing and advertising.

Drawbacks of Segmentation:

Segmentation is very stereo typical as not everyone behaves the same way.

Can be costly and time consuming

More difficult to develop standardised products for different people.

Opportunity costs

Socio Economic Groups: Determines how people spend money

A = Higher Managerial and professional occupations

B = Lower Managerial and Professional occupations

C 1 = Supervisory, clerical, junior managerial

C 2 = Skilled manual workers technical occupations

D = Semi-skilled and unskilled manual workers

E = State Pensioners + Casual Workers

Problems with the social grading to segment market:

Classifies an entire household on the occupation of a single individual

It can’t classify some groups (wealthy who do not work)

It contains no information about the size or structure of households

Very stereotypical and generalised

It’s too broad a classification

1.3.6 The Competition

1.3.6 a) Market mapping

Process of plotting competitor products on a graph to visually illustrate a sector.

Why?

-Assess level of competitors

-Identify gap in the market

-Identify saturated market areas

-Inform Pricing strategy

-Select labels of the grid that suit their product

-Firm select labels of the grid that suit the product

Examples of Grids:

-High Price vs Low price

-Simple vs Complex

-Low Tech vs High Tech

-Basic Quality vs High Quality

-Necessity vs Luxury

Market Positioning

Designing/placing a product to fit the preferences of a target market segment

A product needs to be positioned correctly in order to gain/maximise sales (ie: When there is a gap in the market)

Aim=Create profitable opportunity

==Exam Question:

==‘Assess the value of market mapping’ (8)

Definition

1. Identifies market gaps (KN) →Lead to a good sales opportunity due to less competitors ^^(AN)^^→Higher Chance of success (Expand point) However, there may be a good reason (eg:high price or low quality) why a ‘gap’ has not been taken as there would be no demand ^^(EV)

2. ^^Helps the business with its pricing strategy (KN) →Look at competitors in your group/section and price slighlty below in order to entrice customers →Increased demand (AN) but maybe many established brands so sales won’t increase ^^(EV)

^^Market Mapping:

Advantages:

-Helps spot gaps in the market

-Useful for analysing competitors

-Encourages use of market research

Disadvantages:

-Just because there is a ‘gap’ doesn’t mean there is a demand-Eg:High Price, low quality

-Can be time consuming and products can change especially in dynamic market which reduces reliability of map (Tech)

-Not a guarantee of success

-How reliable is market research→Out of date?

1.3.6 b) Competitive Advantage

→ANY FEATURE OF A BUSINESS THAT ENABLES IT TO COMPETE EFFECTIVELY WITH RIVAL PRODUCTS.

Somehting that give a business an edge over rivals by offering consumers greater value (lower prices) or greater benefits (better service) that justifies higher prices.

Advantages :

Increases customer loyalty so more certainty over sales→Reduces Competition

The business can charge a higher price.

Eg:

Lower Prices→ eg: Aldi

Brand → eg: Nike, Coca Cola

Quality → eg: Thorntons chocolate, Yankee Candle

Performance →eg: Expensive cars

1.3.6 c) Product Differentiation

→DESIGNING/MAKING THE PRODUCT STAND OUT FROM OTHER PRODUCTS (USING A TECHNIQUE/PROCESS) Eg: Coca Cola Life (Different Ingredients)

Advantages of Product Differentiation:

Increases customer loyalty so more certainty over sales

Reduces Competition

The business can charge a higher price.

Disadvantages of Product Differentiation:

May cost more to make/produce

May have competitors entering the market→Might need a patent

Time consuming

Hard to employ specialised workers.

Eg:

After Eight Mints → Distinctive Design and Purpose

Polo Mint → Design

1.3.6 d) Adding Value

Creating worth (value) to a product above its cost of production

How to add value?

Packaging→ Good Impression + Better Quality

Advertising→Creates interest in product and initiates desire to buy

Image→Created by advertising eg: Coca Cola-’drinking it will change your life’

Branding→Creates an image and status (Brand have more status and rich brand)

Convenience→ Vending

Why add value?

Differentiate the product→Charge a higher price

Survive Financially

Focus on a market segment (Type of customer)

Eg:

Pizza Venders:

-Hygienic

-Convenient

-Accessible

-Cheap to produce

1.3.6 (e) How do firms decide on price?

• Competitor Prices

• Strength of brand

• Covering costs

• Profit margin

• Objectives of business (Eg: Cost Leaders → Cheap price)-Differentiation→ Higher Price (Eg: Apple)

• Perceived value (Brand)

• Position in market → Market leader can charge more

• Added Value→ Charge more

1.3.6 (e) How do firms decide on output level? i.e. How much to produce.

Fact: Producing on a large scale usually reduces costs eg: In a factory

Economics of Scale: Makes a lol of products in the time→ Cheaper unit (individual costs)

If more items are produced costs fall (Eg: By sing machines)

Unit Cost of one item/product.

Theoretical: Produce products until the marginal cost (next product) is equal to the revenue (money).

o Think about apple picking→ Apples at the top are tricky to pick.

Static/Stable and Dynamic Markets

• Stable-Pace of change is slow, market size and share quite constant, little variation in price

• Dynamic-Rapid change in demand (affecting by change in income and taste), new entrants to market changes) Can be creative destruction