1.2 the market

• Elasticity – The responsiveness of the second variable to a change in the first.
• Income elasticity of demand (YeD) – How demand responds to a change in income.
• Percentage change in quantity demanded/percentage change in income.
• YeD of different types of goods:

  ·      Luxury goods: When Y goes up, demand goes up significantly.

  o   YeD = Less than 0

  ·      Normal goods: When Y goes up, demand goes up slightly.

  o   YeD = Between 0 and 1

  ·      Necessity goods: When Y goes up, demand remains the same.

  o   YeD = 0

  ·      Inferior goods: When Y goes up, demand goes down.

  o   YeD = Less than 0
• Impact on businesses:

  ·      Allows them to price their products accordingly based on the economic cycle and fluctuations in demand

  ·      E.G Inferior goods will experience a large demand spike during a recession
• Product oriented


  Whereby they focus on the product they want to make and sell
• Product oriented approach

  • Model T Ford
• Advantages of product oriented approach

  • Motivated to create product -> Full commitment and passionate -> Higher productivity and quality of product -> Increased customer satisfaction -> Strengthens brand loyalty
  • Invention of potentially revolutionary idea -> Disrupts status quo of the market and stands out from competition -> Higher demand for product -> Increased customer loyalty -> Strengthens brand loyalty creating price inelastic demand
• Disadvantages of product oriented approach

  • Cost and time of inventing a new product -> Requires significant time planning and investment to fund -> Market may have changed by the time product has been made or invention may have been taken -> Significant risk and potential opportunity cost
  • May not meet customer demands and expectations -> Risk of product failing due to lack of customer consideration -> Costs outweigh benefits -> Opportunity cost with large financial strain
• Market oriented – Whereby they focus on what the market wants from a product. E.G Nike custom shoes
• Advantages of market oriented: +      Meets customer expectations and demand of the market -> Higher customer satisfaction and retention -> Strengthens brand loyalty and ability to charge higher prices (price inelastic demand)

  +      Customers will give feedback based on the product they’ve asked for -> Enables business to improve product quality via modifications and innovation in order to improve customer satisfaction -> Increased customer satisfaction and retention sales -> Strengthens brand loyalty
• Disadvantages of market oriented

  -      Less motivated to create product as it may not be what entrepreneur wants -> Reduced productivity and potentially fall in product quality due to less commitment -> Lower customer satisfaction -> Reduced brand loyalty and market share

  -      Customers may demand product that requires extensive investment and research -> Maximises consumer welfare but not business profits -> Financial strain on business -> Upward pressure on existing product lines -> Fall in sales if loyalty is not strong -> Detrimental to business’ performance
• What dictates the orientation a business will pick:

  ·      The nature of the product.

  ·      The views of those in control.

  The nature and size of the market
• Why businesses are moving to market orientation:

  ·      Customers know more about what they want.

  ·      Internet – E-Commerce to sell to wider range of customers.

  ·      Risky to be product orientated.

  ·      More competitors – Business need to sell what is in demand.

  ·      Product that the business may want to make and sell may be in a saturated market.

  ·      Expensive creating new innovative products.

  ·      Patency issues with other businesses who may also be innovating.
• Market segmentation – Where the market is divided into different segments where individual consumers are grouped by similar needs.
• Geographical segmentation – Based on geographic location of consumers.
• Demographic segmentation – Age, gender, income, social class, ethnicity.
• Psychographic segmentation – Attitudes, opinions and lifestyles.
• Behavioural segmentation – Usage rate, loyalty, date of consumption of products.
• Pros of Market Segmentation

  • Enables business to identify which market segment is most attracted to their product
  • Establishes customer loyalty
  • Strengthens brand loyalty
  • Able to charge higher prices due to price inelastic demand
• Pros of Market Segmentation

  • Allows business to identify opposite market segments and diversify
  • Increases resilience to economic shocks due to multiple revenue streams
  • Strengthens brand image due to more exposure
• Cons of Market Segmentation

  • Other factors more important (E.G No point in identifying best segment if product quality won't satisfy demographic's demands)
  • Opportunity cost of focusing on branding and neglecting other aspects
• Cons of Market Segmentation

  • Risk of alienating and neglecting other segments
  • Focusing on one segment can potentially reduce customer base with customers in other segments feeling less valued
  • Restricts size of customer base and fall in overall customer satisfaction
• Elasticity – The responsiveness of a second variable to a change in the first variable.
• PeD = Percentage change in quantity demanded/percentage change in price.
• Factors affecting Price Elasticity of Demand (PED)

  • Substitutes
  • Percentage of income
  • Luxury/necessity
  • Addiction
  • Time
• Substitutes

  More substitutes available to customers -> More elastic PED is due to price sensitivity in the market from greater consumer choice
• Percentage of income

  Purchase of product takes up a larger percentage of income -> More elastic PED due to the impact it has on consumption habits of consumer
• Luxury/necessity

  Luxury goods has elastic PED, necessary goods have inelastic PED due to the nature of the products with when they are and not required
• Addiction

  More addictive products have inelastic PED due to small price changes having almost no effect on urge for product. Addicted consumers will purchase products regardless of price changes
• Time

  More time the consumer has to process information and compare different products, the more elastic PED will be. Able to assess what maximises their benefit rationally and select accordingly
• Demand – The amount of goods or services that customers are willing and able to buy at a given price.
• Price and demand have an inverse relationship. As the price of a good/service decreases, the demand for the good increases as consumers will be more willing and able to purchase products at lower prices.
• Shift – Where the curve moves either to the left or the right. In some cases, up or down.
• The demand curve shifts right, as firms will increase prices and increase quantity knowing there is a higher demand, in order to maximise profits.
• The demand curve shifts left, as firms will decrease prices and decrease quantity to make their goods/services more appealing at lower prices, due to the lack of demand at the original price.
• Factors affecting demand:

  Population

  Advertising

  Substitutes

  Income

  Fashion/trends

  Interest rates

  Compliments
• Other demand side factors:

  ·       External shocks

  ·       Branding

  ·       Seasonality
• Supply – The amount of goods or services that firms are willing and able to provide at a given price.
• Price and supply have a positive relationship. As the price of a good increases, the quantity increases, as firms are more willing and incentivised to supply more goods/services at higher prices, as they aim to maximise profits.