1.2.1 - How markets work

• Factors affecting demand include price, weather + seasons, government legislation, advertising bans for cigarettes, age restrictions for fireworks, and incentives such as subsidies.
• Subsidies can reduce prices for consumers, which can increase affordability.
• Advertising can make customers more aware of the benefits of a product.
• Changes in taste or fashion can influence demand, for example, if something becomes more fashionable, we expect the demand for it to increase.
• Demographics, such as a much larger population or an ageing population, can affect demand.
• Higher prices for one product may encourage customers to buy more of another product, this is known as complements.
• Demand curves show the relationship between price and quantity demanded.
• Diminishing marginal utility theory states that as the quantity of a good increases, the marginal utility decreases.
• Increasing demand theory suggests that as the price of a good increases, the quantity demanded increases.
• Methods to raise demand include offering a free trial or discounted price, which allows consumers to experience the benefits of the product without paying.
• In 2023, inflation is high, which has reduced real incomes and consumer spending.
• There are a number of cheaper substitutes such as Zumba classes and round the clock gyms (e.g The Gym), which may reduce demand.
• Targeting a wider range of customers by demonstrating the product in public locations, such as parks, is a form of advertising which raises awareness of the benefits of the product, which can lead to higher demand.
• There may be legal restrictions in selling or advertising your product in certain locations, therefore permission may be required, which can raise costs.
• Price matters in demand for peak time rail travel as commuters have a price inelastic demand due to the lack of close substitutes and the increase in demand due to COVID.
• Demand for fizzy and soft drinks is price elastic as there are many competing products in the market and zero cost of switching.
• Demand for over the counter painkillers is less price sensitive as consumers need them at key times and purchase is a necessity.
• Income elasticity is the change in quantity demanded due to a change in income.
• Income elasticity is represented as the slope of the linear equation Y = a + bX, where Y is quantity demanded, X is income, and a and b are coefficients.
• Income elasticity is a measure of the responsiveness of quantity demanded to changes in income.
• A positive income elasticity indicates that an increase in income leads to an increase in quantity demanded.
• A negative income elasticity indicates that a decrease in income leads to an increase in quantity demanded.
• Zero income elasticity indicates that quantity demanded is unchanged by changes in income.
• Demand for vet services is price inelastic as pet owners have a strong attachment to their pets and are willing to pay nearly any price for essential treatment.
• Demand for individual pet insurance policies is more price elastic as there are many competing insurance policies available in the market.
• Demand is more price elastic for necessities like cigarette, alcohol, Netflix.
• The greater the level of need, the more willing a consumer is to buy it even the price increases, making the demand more price inelastic for emergency painkillers.
• The greater the percentage of income spent on the product, the more important price is as a consideration, therefore, demand is more price elastic for products like Mortgage payments v clothes.
• If the coefficient of price elasticity of demand is greater than 1, it indicates price elastic demand, meaning a small change in price leads to a relatively larger change in the quantity demanded.
• Consumers are highly responsive to price changes, and a price increase will likely result in a decrease in total revenue for the seller, while a price decrease may lead to an increase in total revenue.
• If the coefficient of price elasticity of demand is less than 1, it indicates price inelastic demand, meaning a change in price causes a smaller % change in quantity demanded.
• Consumers are less sensitive to price changes, for example, a 20% rise in price might lead to only a 5% contraction in demand.
• In this case, a price rise will increase total revenue.
• Necessities like food and medicine often exhibit inelastic demand because consumers are less likely to change their purchasing behavior even if prices change significantly.
• Cross elasticity of demand can be used for product bundling and interdependent pricing.