Introduction to Demand
Welcome! In this chapter, we are going to explore one of the most important concepts in Business: Demand. Have you ever wondered why suddenly everyone wants the latest iPhone, or why ice cream sells better in July than in January? That is demand in action!
Understanding demand helps businesses decide what to produce, how much to charge, and when to launch new products. Don't worry if it seems a bit technical at first—we’ll break it down piece by piece using examples you see every day.
What is Demand?
In Business, demand isn't just "wanting" something. It is effective demand. This means a consumer not only wants a product but also has the ability to pay for it at a specific price.
Quick Review:
If you want a Ferrari but only have £10 in your pocket, that is "desire," not "demand." For it to be demand, you need the cash to back it up!
Factors Leading to a Change in Demand
While price is a huge factor, many other things can cause demand to go up or down. In your exam, you need to know these determinants of demand. These factors cause the demand curve to shift (the whole line moves) rather than just moving along the line.
1. Prices of Substitutes and Complementary Goods
Products don't exist in a vacuum. Their demand is often linked to other products.
Substitutes: These are "either/or" goods. If the price of Pepsi goes up, people will switch to Coca-Cola. Therefore, demand for Coke rises because its rival became more expensive.
Complementary Goods: These are "go together" goods, like printers and ink cartridges. If the price of PlayStation consoles drops, the demand for PlayStation games will likely increase because more people now own the console.
2. Changes in Consumer Incomes
When people earn more money, their spending habits change. However, it depends on the type of product:
- Normal Goods: Demand increases as income rises (e.g., eating out at restaurants, designer clothes).
- Inferior Goods: Demand actually falls as income rises. Think of "value brand" noodles—when you get a pay rise, you stop buying the cheap stuff and upgrade to something better!
3. Fashions, Tastes, and Preferences
Demand is heavily influenced by what is "cool" right now.
Example: Think of Fidget Spinners. In 2017, demand was massive because they were a huge trend. A year later, tastes changed, and demand almost disappeared.
4. Advertising and Branding
The whole point of marketing is to increase demand. Successful advertising makes a product more desirable, shifting the demand curve to the right. Branding creates loyalty; people might demand an Apple product specifically, even if cheaper alternatives exist.
5. Demographics
This refers to the structure of the population (age, gender, etc.).
Example: If the UK has an "ageing population" (more elderly people), the demand for healthcare services and retirement homes will naturally increase.
6. External Shocks
These are unexpected events outside of a business's control.
- Natural Disasters: A flood might increase demand for repair services.
- Global Pandemics: COVID-19 caused a massive spike in demand for face masks and home exercise equipment, but a huge drop in demand for air travel.
7. Seasonality
Some products are only wanted at certain times of the year.
Example: You probably don't see many people buying Christmas trees in May! Similarly, demand for sun cream peaks in the summer and drops in the winter.
Key Takeaway: Demand isn't just about price. Factors like income, trends, and even the weather can completely change how much of a product people are willing to buy.
Memory Aid: The "PASSED" Mnemonic
To remember the factors that shift demand, try the word PASSED:
P - Population (Demographics)
A - Advertising & Branding
S - Substitutes & Complements (Prices of other goods)
S - Seasonality
E - External Shocks
D - Disposable Income
Common Mistakes to Avoid
Confusing "Movement" with "Shift":
- If the price of the product itself changes, we move along the demand curve. (This is called a change in quantity demanded).
- If any other factor (like income or fashion) changes, the entire curve shifts left or right. (This is a change in demand).
Analogy: Think of a train. Changing the price is like the train moving forward or backward on its tracks. A change in "Demand" (the factors above) is like picking up the tracks and moving them to a different city!
Step-by-Step: What Happens to Demand?
When you are given a business scenario, follow these steps to figure out the impact on demand:
1. Identify the factor: Is it a change in income? A trend? A competitor's price?
2. Determine the direction: Will this make consumers want the product more or less?
3. The Shift: If they want it more, the demand curve shifts Right. If they want it less, it shifts Left.
4. The Business Impact: How will the business react? (e.g., increasing production or raising prices).
Did You Know?
The "Lipstick Effect": Economists have noticed that during financial crashes (when incomes fall), the demand for expensive luxury cars drops, but the demand for small luxuries like high-quality lipstick actually goes up! This is because people still want a "treat" but can no longer afford the big-ticket items.
Summary Checklist
- Can you define Effective Demand?
- Do you know the difference between a Substitute and a Complement?
- Can you explain why demand for "Value Range" bread might fall when people get richer? (Inferior goods).
- Can you list at least four factors that would shift a demand curve?
Keep going! You’ve just mastered the basics of how markets work from the consumer's side. Next, we will look at things from the business's side: Supply.