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3
Demand and
the Consumer
Demand and the Firm
• Market demand
– competitive markets and the market price
– imperfectly competitive markets
• Demand for the firm
– price takers
• horizontal demand curve (perfectly elastic)
• effect of changes in market demand and supply
– price makers
• downward sloping demand curve
• important for firms to know the price elasticity
• in firms' interests to make demand less elastic
Understanding Consumer Behaviour
• Utility and consumer satisfaction
• Total and marginal utility
– diminishing marginal utility
• Marginal utility and the demand curve
– an individual’s demand curve.
Deriving an individual person’s demand curve
MU, P
P1
a
Consumption at Q1
where P1 = MU
MU = D
O
Q1
Q
Deriving an individual person’s demand curve
MU, P
P1
a
Consumption at Q2
where P2 = MU
b
P2
MU = D
O
Q1
Q2
Q
Deriving an individual person’s demand curve
MU, P
P1
a
Consumption at Q3
where P3 = MU
b
P2
c
P3
MU = D
O
Q1
Q2
Q3
Q
Understanding Consumer Behaviour
• Utility and consumer satisfaction
• Total and marginal utility
– diminishing marginal utility
• Marginal utility and the demand curve
– an individual’s demand curve
– the firm's demand curve
Understanding Consumer Behaviour
• Utility and consumer satisfaction
• Total and marginal utility
– diminishing marginal utility
• Marginal utility and the demand curve
– an individual’s demand curve
– the firm's demand curve
• the shape of the demand curve
Understanding Consumer Behaviour
• Utility and consumer satisfaction
• Total and marginal utility
– diminishing marginal utility
• Marginal utility and the demand curve
– an individual’s demand curve
– the firm's demand curve
• the shape of the demand curve
• shifts in the demand curve
Understanding Consumer Behaviour
• The problem of imperfect consumer
information
– risk and uncertainty
• Insurance: a way of removing risks
– how insurers spread risks
• the law of large numbers
• importance of the independence of risks
– problems for insurers
• adverse selection
• moral hazard
Estimating and Predicting Demand
• Methods of collecting data
– Market observations
• seeing how demand has changed over time
• seeing how possible determinants of demand
have changed over time
• using the information to estimate determinants
of demand
– but past relationships may not hold in future
Estimating and Predicting Demand
• Methods of collecting data (cont.)
– Market surveys
• advantages
• conditions for accuracy of market surveys
–
–
–
–
–
random sample
clarity of the questions
avoidance of leading questions
truthful response
stability of demand
– Market experiments
• types of market experiment
• problem of possible lack of realism
Estimating and Predicting Demand
• Forecasting demand
– Simple time-series analysis
• use of simple time-series analysis
• limitations of simple time-series analysis
– The decomposition of time paths
•
•
•
•
•
trends
cyclical fluctuations
seasonal fluctuations
short-term shifts in demand or supply
limitations of simple the analysis
Sales (number of jumpers)
The decomposition of time paths
Trend
Cyclical
Seasonal
Actual
0
1
2
3
4
5
Years
6
7
8
9
10
Estimating and Predicting Demand
• Forecasting demand
– Simple time-series analysis
• use of simple time-series analysis
• limitations of simple time-series analysis
– The decomposition of time paths
•
•
•
•
•
trends
cyclical fluctuations
seasonal fluctuations
short-term shifts in demand or supply
limitations of simple the analysis
– Barometric forecasting
Estimating and Predicting Demand
• Forecasting demand
– Simple time-series analysis
• use of simple time-series analysis
• limitations of simple time-series analysis
– The decomposition of time paths
•
•
•
•
•
trends
cyclical fluctuations
seasonal fluctuations
short-term shifts in demand or supply
limitations of simple the analysis
– Barometric forecasting
• using leading indicators
Estimating and Predicting Demand
• Forecasting demand
– Simple time-series analysis
• use of simple time-series analysis
• limitations of simple time-series analysis
– The decomposition of time paths
•
•
•
•
•
trends
cyclical fluctuations
seasonal fluctuations
short-term shifts in demand or supply
limitations of simple the analysis
– Barometric forecasting
• using leading indicators
• limitations of barometric forecasting
Influencing demand
• Product differentiation
– Features of a product
• technical standards
• quality standards
• design standards
• service characteristics
– Vertical and horizontal product
differentiation
– Market segmentation
• targeting specific parts of the market
• niche markets
Influencing demand
• Marketing the product
– Product / market strategy
• alternative approaches
• a growth vector matrix
– market penetration
– product development
– market development
– diversification
Growth vector components
Product
Present
A
Present
Market
penetration
New
B
Product
development
Market
C
New
D
Market
Diversification
development
Influencing demand
• Marketing the product (cont.)
– The marketing mix
• product considerations
• pricing considerations
• place considerations
• promotion considerations
Influencing demand
• Advertising
– Aims of advertising
• shifting the demand curve to the right
• making demand less price elastic
– creating greater brand loyalty
Effect of advertising on the demand curve
P
Advertising shifts the
demand curve to the right
and makes it less elastic
P1
D1
O
Q1
Q
Effect of advertising on the demand curve
P
P1
D2
D1
O
Q1
Q2
Q
Effect of advertising on the demand curve
P
P2
P1
D2
D1
O
Q1
Q3
Q2
Q
Influencing demand
• Advertising
– Aims of advertising
• shifting the demand curve to the right
• making demand less price elastic
– creating greater brand loyalty
– Effects of advertising
Influencing demand
• Advertising
– Aims of advertising
• shifting the demand curve to the right
• making demand less price elastic
– creating greater brand loyalty
– Effects of advertising
• advertising and the long run
Sales (weekly)
Advertising and the long run
Habit sales
s2
Direct effect
on sales
Sales
s3
s1
Long-term
effect
Sales
Advertising
campaign
t1
t2
t3
t4
t5
Time
Influencing demand
• Advertising
– Aims of advertising
• shifting the demand curve to the right
• making demand less price elastic
– creating greater brand loyalty
– Effects of advertising
• advertising and the long run
• advertising and company growth
Advertising, profit margins and company growth
Advertising expenditure relative to competitors
Product image and
company reputation
Relative quality of offering
Relative price
(Relative) customer value
Real market growth
Growth
Market share
Profit margins
Influencing demand
• Advertising (cont.)
– Assessing the effects of advertising
• benefits of advertising
– to firms
– to consumers
• costs of advertising
– to firms
– to consumers and society generally