Demand and Supply (Edexcel A-Level Business): Revision Notes

Factors leading to a change in demand

Understanding demand

Demand refers to the quantity of a product that consumers are both willing and able to purchase at any given price. This is different from what consumers might want to buy – demand focuses on what people can actually afford and would purchase in the market.

For example, demand for cars in the UK market at an average price of £9,000 might be 130,000 units per year. This represents effective demand, not just desire to own a car.

The demand curve and inverse price-quantity relationship

Demand can be illustrated using a demand schedule (a table showing quantities demanded at different prices) and a demand curve (a graph plotting this relationship).

The demand curve slopes downward from left to right, demonstrating an inverse relationship between price and quantity demanded. This means:

• When price increases, quantity demanded falls
• When price decreases, quantity demanded rises

This relationship holds ceteris paribus (assuming all other factors remain constant).

In the button mushroom example above, at £0.50 per kilo, consumers demand 100,000 kilos. At £2.50 per kilo, demand falls to just 20,000 kilos. This inverse relationship is fundamental to understanding market behaviour.

Movement along the demand curve vs shifts in demand

It's crucial to distinguish between two types of changes:

Movement along the demand curve occurs when the price of the product itself changes. In the mushroom diagram, a price fall from £1.50 to £1.00 causes a movement from point X to point Y along the curve. This represents an extension in demand (quantity demanded rises from 60,000 to 80,000 kilos). A price rise would cause a contraction in demand. The curve itself does not move.

Shifts in the demand curve occur when factors other than price change. These shifts represent a change in demand at every price level. The entire curve moves position – rightward for an increase in demand, leftward for a decrease.

Factors causing shifts in demand

Seven key factors can cause the demand curve to shift, changing demand at all price levels. Understanding these is essential for businesses making strategic decisions.

1. Prices of substitute goods

Substitute goods are products that can replace each other in consumption because they satisfy similar needs or wants. For example, Coca-Cola and Pepsi-Cola are close substitutes, as are different brands of mobile phones or supermarket own-label products versus branded items.

For instance, if the price of winter sun holidays decreases, demand for skiing holidays would fall as consumers opt for the cheaper beach alternative instead.

2. Prices of complementary goods

Complementary goods are products consumed together – they are used in combination. Classic examples include:

• Cornflakes and milk
• Cars and car insurance
• Smartphones and mobile phone contracts
• Skis and skiing accessories

For example, a reduction in the price of skiing accessories (boots, poles, clothing) may encourage more people to take up skiing, increasing demand for skiing holidays. Similarly, falling prices for gaming consoles would likely increase demand for video games.

3. Changes in consumer incomes

The relationship between income and demand depends on the type of good:

Normal goods are products for which demand increases when consumer incomes rise. Most goods and services fall into this category. Examples include:

• Restaurant meals and dining out
• New cars
• Holiday travel
• Consumer electronics
• Designer clothing

When wages and salaries increase, consumers have greater purchasing power and typically demand more normal goods. During economic growth periods, demand for these products rises (rightward shift).

Inferior goods are products for which demand actually falls when incomes rise. These are typically lower-quality alternatives that consumers move away from as they become wealthier. Examples include:

• Supermarket own-label/value ranges (e.g., basic canned goods)
• Public transport (consumers may switch to private cars)
• Budget accommodation
• Second-hand goods

For skiing holidays (typically a normal good), rising consumer incomes would shift demand from D to D₁, while falling incomes during a recession would shift demand from D to D₂.

4. Fashions, tastes and preferences

Consumer tastes and preferences constantly evolve, significantly impacting demand patterns. Changes can be driven by:

Fashion trends: The clothing industry experiences rapid changes in demand as styles go in and out of fashion. Items popular in one season may be unwanted the next, causing sharp shifts in demand curves.

Celebrity influence and cultural trends: The rise in UK cycling demand since 2005 demonstrates this effect. Bradley Wiggins' Tour de France success and British Olympic cycling achievements sparked increased interest in the sport.

Lifestyle changes: Growing demand for 4x4 vehicles in the UK occurred not because more people needed off-road capability, but because consumer preferences shifted toward finding these vehicles appealing and desirable.

Health consciousness: Increased awareness of healthy eating has boosted demand for organic foods, fresh vegetables, and low-sugar products, while reducing demand for processed foods high in fat and sugar.

When fashions or preferences change favourably toward a product, the demand curve shifts from D to D₁. Negative changes shift demand from D to D₂.

5. Advertising and branding

Businesses invest heavily in advertising and branding specifically to shift demand curves rightward and increase sales at all price points.

How advertising works: Effective advertising campaigns:

• Increase product awareness among potential customers
• Create positive associations and emotional connections with brands
• Differentiate products from competitors
• Remind existing customers to repurchase

Successful advertising and branding campaigns shift the demand curve from D to D₁, allowing businesses to sell more units at each price level. For skiing holidays, increased marketing spending would likely shift demand rightward.

6. Demographics

Demographics refers to the characteristics of a population, including its size and structure. As population composition changes, so do patterns of demand.

Population size: As the overall population grows, demand for nearly all goods and services increases. More people means more potential consumers, shifting demand curves rightward for most products.

However, the structure of the population matters just as much as its size:

Gender distribution affects demand patterns:

• In the UK, there are slightly more women than men overall
• In older age groups, the female-to-male ratio increases further
• This creates greater demand for women's clothing than men's clothing
• Gender-specific products see demand influenced by population gender balance

Geographical distribution impacts where demand occurs:

• Urban areas have higher concentrations of people than rural areas
• This increases demand for schools, hospitals, housing, and transport in cities
• Rural areas see lower demand for many services due to lower population density
• Businesses must consider location when assessing demand

Household structure affects demand for certain products:

• Growth in single-person households increases demand for smaller accommodation units (studios, one-bedroom flats)
• Larger family households create demand for family-sized cars, bigger properties, and bulk shopping
• Changes in household composition shift demand curves for housing, furniture, and household goods

Changes in demographics that favour a product shift demand from D to D₁, while unfavourable changes shift demand from D to D₂.

7. External shocks

External shocks are factors beyond businesses' direct control that can significantly impact demand. These unpredictable events can cause sudden shifts in demand curves.

Government action: Government policies and legislation influence demand in multiple ways:

• Tax changes: Raising income taxes reduces consumers' spending power, dampening demand for many products (leftward shift)
• Regulation: New laws designed to increase competition in gas and electricity markets might reduce demand for existing operators as consumers switch to new entrants
• Subsidies: Government subsidies for electric vehicles increase demand by effectively lowering the price to consumers
• Legal restrictions: Bans or restrictions on certain products (e.g., single-use plastics) reduce their demand to zero

Economic climate: The overall state of the economy significantly affects demand:

• Economic growth: When GDP rises, employment increases and wages grow, boosting demand for most goods and services (rightward shift from D to D₁)
• Recession: Economic downturns reduce employment and incomes, decreasing demand especially for non-essential goods like skiing holidays (leftward shift from D to D₂)
• Consumer confidence: Even expectations of future economic conditions affect current demand – pessimistic consumers reduce spending in anticipation of harder times ahead

External shocks can shift demand either direction depending on their nature – positive shocks shift from D to D₁, while negative shocks shift from D to D₂.

8. Seasonality

Seasonal demand refers to predictable fluctuations in demand at particular times of the year. Unlike other factors, seasonality creates temporary, recurring shifts in demand.

Weather-driven seasonality:

• Demand for garden furniture rises in late spring as weather improves in the UK
• Warm clothing (overcoats, woolly jumpers) sees increased demand in late autumn when temperatures drop
• Ice cream and cold drinks experience summer demand peaks
• Heating fuel demand rises sharply during winter months

Industry-specific seasons:

• Fashion industry: Has distinct buying seasons – items purchased in one season typically won't be in demand later due to changing fashions
• Tourism: Holiday destinations experience peak and off-peak seasons based on weather and school holidays
• Agriculture: Fresh produce has harvest seasons affecting supply and demand
• Sports equipment: Demand for skiing equipment peaks before winter, while demand for cricket gear rises in spring

Seasonal increases shift demand temporarily from D to D₁, while seasonal decreases shift from D to D₂. These are predictable, recurring shifts that businesses can plan for, unlike unpredictable external shocks.

Remember!