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T HEME 1: M ARKETING AND PEOPLE How much would you pay for a can of Coca Cola? • Would you pay 50p? • Would you pay 80p? • Would you pay £1.00? • Would you pay £1.20? What happens to demand as price goes up? How much would you pay for a can of Tesco Cola? Is this different to Coca Cola? Why? 1.2 T HE M ARKET Edexcel Business 1.2.1 D EMAND 1.2.1 D EMAND In this topic you will learn about Factors leading to a change in demand: changes in the prices of substitutes and complementary goods changes in consumer incomes fashions, tastes and preferences advertising and branding demographics external shocks seasonality DEMAND Low prices see increased demand for gold. Demand is the amount society is willing and able to buy at a set price at a given point in time T HE DEMAND CURVE Rules for drawing a demand curve: i) label the y axis price and the x axis quantity ii) draw the demand curve downward sloping from left to right and label it demand (or D) iii) to find the quantity demanded at any given price: a) select a price (P), shown on the y axis b) draw a dotted line towards the demand curve c) draw a dotted line down D towards the x axis to show quantity (Q) Price P 0 Q Quantity T HE It is important that you master the drawing of diagrams in Business. Marks are often lost for the incorrect drawing of diagrams. Rules for drawing a demand curve: i) label the y axis price and the x axis quantity ii) draw the demand curve downward sloping from left to right and label it demand (or D) iii) to find the quantity demanded at any given price: a) select a price (P), shown on the y axis b) draw a dotted line towards the demand curve c) draw a dotted line down D towards the x axis to show quantity (Q) Price P 0 DEMAND CURVE Q Quantity T HE A change in price is shown Price by a movement along the demand curve. P1 DEMAND CURVE A change in price from P to P1is shown by a movement along the demand curve lowering quantity demanded form Q to Q1. P D Q1 Q Quantity T HE DEMAND CURVE A change in price from £10 to £15 is shown by a movement along the demand curve with quantity demanded falling from 100 to 120 units. Price £15 £10 D 100 120 Quantity T HE Show on the demand curve what would happen if price fell from P to P1. DEMAND CURVE Explanation of diagram: Price P D Q Quantity FACTORS LEADING TO A CHANGE IN DEMAND If a change in demand is caused by a change in price this is shown by a movement along the demand curve If the change in demand is caused by a change in any other factor this is caused by a shift in the demand curve What factors other than price will influence demand? FACTORS Recap. What is meant by the term demand? LEADING TO A CHANGE IN DEMAND Factors leading to a change in demand include: changes in the prices of substitutes and complementary goods changes in consumer incomes fashions, tastes and preferences advertising and branding demographics external shocks seasonality C HANGES IN THE PRICES OF SUBSTITUTES AND COMPLEMENTARY GOODS Changes in the price of substitute and complementary goods will have a major impact on the quantity demanded of a product A substitute product acts as an alternative, therefore creating competition If the price of good A increases, the demand for good B will increase e.g. Coca-Cola and Pepsi Cola There is a positive correlation A complementary product is bought alongside a good or service If the price of good A increases, the demand for good B will decrease e.g. fish and chips There is a negative correlation Pizza and ice-cream wars. Explain what is happening in these 2 articles. IN PAIRS For each product give an example of a substitute product and a complementary product. Product A iPhone Jam Child’s scooter Package holiday abroad Sunday Times Substitute Complement C HANGES IN CONSUMER INCOMES As the income of consumers increases demand for some goods and services will increase Does this depend upon the nature of the good? Necessities It is less likely that demand for these will change in relation to income e.g. would you start buying more milk or less soap if your income changed? Luxuries If income increase customers may be able to afford more luxuries increasing demand , equally if incomes fall these may be the first items to cut e.g. not booking a holiday Inferior goods If incomes increase demand may decrease as customers switch to being able to afford a better quality product e.g. would you stop buying own brand Tesco beans and start buying Heinz FASHION , TASTES AND PREFERENCES Is ‘Made in Britain’ back in fashion? People’s tastes change over time and demand for fashionable products changes regularly As some products become more fashionable there is an increase in demand Just as quickly demand can disappear as tastes and fashion change What goods and services have seen an increase in demand in recent years as a result of changes in fashion, tastes and preferences? A DVERTISING AND BRANDING Advertising is a promotional method that involves the use of media to communicate with existing and potential consumers Purpose is to generate awareness and desire Branding is a promotional method that involves the creation of an identity for a business that distinguishes the firm and its products from competitors If successful both advertising and branding will lead to an increase in demand However if brand reputation is damaged or advertising gives the wrong message demand can decrease D EMOGRAPHICS Demographic factors are the statistical characteristics of the population, these include for example: Age Gender Ethnic mix Migration has seen an increase in demand for a wide range of goods and services e.g. housing, public transport and healthcare Demographics also influences the types of products demanded e.g. changing taste of a more diverse nation and different demands from an ageing population E XTERNAL SHOCKS External shocks are unexpected events that are outside of the businesses control but have a direct impact on the level of demand Consider how each of the following external shocks could influence the demand for certain goods and services: 2008 global financial crisis Flash floods in the south of the UK Outbreak of disease e.g. foot and mouth or bird flu S EASONALITY Seasonality refers to fluctuations in demand depending upon the time of year Seasonality exists because of: Changes in the weather Public holidays e.g. Christmas and Ramadan Consider how seasonality affects the demand for the following goods and services: Child care Fashion Confectionery Household utilities Caravan parks S HIFTS IN THE DEMAND CURVE If the change in demand is caused by any factor other than price then the demand curve shifts An increase in demand is shown by a shift to the right A decrease in demand is shown by a shift to the left What happens to the demand curve if the change in demand is because of a change in price? Draw a diagram to illustrate your answer S HIFTS Price Why has there been an increase in demand for organic food? IN THE DEMAND CURVE A change in any factor other than price e.g. tastes is shown by a shift in the demand curve. An increase in demand can be seen by a shift in the demand curve to the right from D to D1 D D1 Quantity S HIFTS IN THE DEMAND CURVE This shows that at price P the quantity demanded has increased from Q to Q1. Price P D Q Q1 D1 Quantity S HIFTS What other factors would cause the demand curve to shift to the left? Price IN THE DEMAND CURVE What will happen if there is a decrease in demand due to factors other than price e.g. a decline in population? Draw a new demand curve and label it D1. D1 D Quantity Q UICK TEST Company A decides to lower prices in order to try and shift surplus stocks. How would this be shown on a demand curve? a) A movement along the demand curve to the right b) A shift of the demand curve to the right c) A movement along the demand curve to the left d) A shift of the demand curve to the left Can you explain your answer? Q UICK TEST The diagram opposite shows a shift in demand for “Milkit ice cream” from D to D1. What is the most likely cause of this? Price D D1 Quantity a) A rise in price of “Milkit ice cream” b) A fall in price of “Milkit ice cream” c) Closure of a competitor of “Milkit ice cream” d) Poor weather conditions throughout the summer Can you explain your answer? 1.2.1 D EMAND In this topic you have learnt about Factors leading to a change in demand: changes in the prices of substitutes and complementary goods changes in consumer incomes fashions, tastes and preferences advertising and branding demographics external shocks seasonality