Welcome to Chapter 6.1: What is the Market?
In this chapter, we are diving into the world of External Influences. Specifically, we’re looking at "the market." Think of the market as the stage where the drama of business happens. If you understand how the stage is set, you’ll understand why businesses make certain decisions. Don't worry if these terms sound like "Economics" — we are going to look at them purely through the eyes of a business owner!
6.1.1 What is the Market?
At its simplest level, a market is any place where buyers and sellers come together to trade. It doesn't have to be a physical place like a high street; it can be an app like Vinted or a website like Amazon.
Every market has two sides:
- Demand (The Buyers): This represents the customers who want and are able to buy a product.
- Supply (The Sellers): This represents the businesses that are willing and able to provide the product.
Why does this matter to a business?
A business needs to know if there is enough demand to make a profit and how much supply is already out there (the competition). If demand is high and supply is low, it’s usually a "gold mine" for a business!
Quick Review: The Market Basics
Market = Buyers + Sellers
Demand = I want to buy it
Supply = I want to sell it
6.1.2 Factors Affecting Demand
Demand isn't just about how much people "like" something. It’s about how many people are actually going to open their wallets. Several factors can make demand go up or down. Don't worry, you don't need to draw any graphs for this exam! You just need to understand what causes the changes.
What makes customers buy more (or less)?
1. Price: Usually, if the price goes up, demand goes down. Example: If a bar of chocolate doubles in price, you might buy a bag of crisps instead.
2. Income: When people earn more money, they tend to spend more. Example: If everyone gets a pay rise, demand for luxury holidays might increase.
3. Price of Related Products: This is a big one! There are two types:
• Substitutes: These are "rival" products. If the price of Coca-Cola goes up, demand for Pepsi (the substitute) might go up.
• Complements: These are products that "go together." If the price of printers drops, the demand for ink cartridges (the complement) will go up.
4. Tastes and Fashion: Trends change! Example: Demand for "vapes" has gone up while demand for traditional cigarettes has fallen due to changing tastes and health trends.
5. Expectations: If people think the price will rise next month, they might buy it now, increasing current demand.
6. Number of Consumers: If the population grows (or a business starts selling in a new country), there are more potential buyers.
7. Promotion: Successful advertising and branding increase demand. That’s why companies spend millions on Super Bowl or World Cup ads!
Memory Aid: "P.I.T.S."
Think of what affects demand as P.I.T.S.: Price, Income, Tastes, Substitutes.
Key Takeaway: Demand is external. A business can influence it with promotion, but they can't control things like customer income or the weather!
6.1.2 Factors Affecting Supply
While demand is about the customers, Supply is about the businesses. What makes a business want to produce more or less of a product?
What makes businesses sell more (or less)?
1. Production Costs: If it costs more to make a product (e.g., higher wages or raw material prices), the business might supply less because it’s less profitable.
2. Number of Businesses in the Market: If five new coffee shops open on one street, the total supply of coffee in that market increases.
3. Capacity: A business can only supply what its factory or shop is physically capable of producing. If they reach "full capacity," they can't supply any more without a new building.
4. Weather: This is huge for farming. A bad frost can ruin a crop of strawberries, meaning the supply drops significantly.
5. Productivity: If workers get faster or better machines are bought, the business can supply more in the same amount of time.
6. Taxation and Subsidies:
• Taxes: If the government increases tax on a product (like a "Sugar Tax"), it becomes more expensive to produce, so supply may fall.
• Subsidies: This is when the government gives money to a business to help them. This makes it cheaper to produce, so supply increases.
Analogy: Imagine you are making pizzas to sell. If the price of cheese doubles (Production Costs), you might make fewer pizzas. If you get a faster oven (Productivity), you can make more!
6.1.3 Influence of Competition
Competition is a major external influence. A business doesn't exist in a bubble; it’s constantly being watched by rivals. The OCR syllabus wants you to focus on three things regarding competition:
1. Number of Competitors: Is the business one of 100 small shops (like a local hairdresser), or is it one of only two or three giants (like Coca-Cola and Pepsi)? The more competitors there are, the harder a business has to work to get noticed.
2. Size of Competitors: Small businesses often struggle to compete with "The Big Guys." Large competitors have economies of scale, meaning they can buy in bulk and sell at lower prices than a small local shop can.
3. Behaviour of Competitors: What are they doing? If a rival slashes their prices, launches a massive new advert, or releases a better version of your product, your business must respond or risk losing all its customers.
Impact of Competition on a Business:
- Pressure to lower prices: To keep customers from switching.
- Need for Innovation: Businesses must keep making products "new and improved."
- Increased Marketing Spend: Businesses have to spend more on ads just to stay visible.
Did you know?
Competition isn't always bad! It can force a business to become more efficient and creative, which can actually lead to higher profits in the long run if they do it better than their rivals.
Common Mistakes to Avoid
Mistake 1: Thinking Demand and Supply are the same. Remember: Demand = Customers; Supply = Businesses.
Mistake 2: Thinking a "Market" is only a physical place. In the modern world, the biggest markets are digital.
Mistake 3: Forgetting about Complements. Many students remember Substitutes (alternatives) but forget that some products rely on others (like cars and petrol).
Final Summary: The Big Picture
A market is where buyers (demand) and sellers (supply) meet. Demand is influenced by how much money people have and what is "cool" at the time. Supply is influenced by how much it costs to make things and the technology available. Competition is the "wildcard" that forces businesses to keep their prices low and their ideas fresh. Understanding these external factors helps a business plan for the future!