D2 Relationship between demand, supply and price
• Influences on demand, e.g. affordability, competition, availability of substitutes, level of Gross Domestic Product (GDP), needs and aspirations of consumers.
• Influences on supply, e.g. availability of raw materials and labour, logistics, ability to produce profitably, competition for raw materials, government support.
• Elasticity: price elasticity of demand. D3 Pricing and output decisions
• Impact on pricing and output decisions in different market structures.
• Reponses by business to pricing and output decisions of competitors in different market structures.
You have started to explore the relationship between demand and price. Business markets rely on examining the relationship between demand, price and supply.
Affordability: If something is expensive, people might buy less of it. For instance, if the price of a popular smartphone increases, demand might go down because not everyone can afford it.
Competition: Demand can reduce significantly if the competition reduces its prices for like products , quality and service. When there are many options, people might choose the cheaper one. If there are several pizza places in a neighbourhood, their prices could influence demand.
Availability of Substitutes: If a product has many alternatives, people might switch if the price goes up. Coffee and tea are substitutes, so if coffee prices increase, demand for tea might rise.
Level of Gross Domestic Product (GDP): The GDP is one of the most important indicators used by economists to calculate the state of the economy. The ONS (Office National Statistics) produces these figures and relies on quarterly data gathered from:
Output- The value of goods and services produced from a sample of every type of business and sector.
Expenditure- The value of all goods and services purchased by businesses, government and individuals including all exported sales.
Income- The value of money generated primarily through wages and profits.
When the economy is doing well, people have more money to spend. If the GDP goes up, people might buy more luxury items like fancy electronics.
Needs and Aspirations of Consumers: Consumers influence demand by their needs and aspirations. Our needs include basic requirements such as food warmth, water and safety. These are common to everyone. Consumers also have other and varying needs which are those products and services they are used to and believe they cannot or do not want to live without. These might include...
mobile phones
technology and multimedia
entertainment
beauty treatments
own transport
These examples increase demand on businesses and also influence price, which may go up as well as down.
We also have aspirations which might include:
latest trends in clothing
technology improvements
home improvements such as luxury kitchens and bathrooms
home or garden projects
larger housing or improved location
newer, faster or bigger transport
holidays (more frequent and luxurious)
If people really want something, they'll buy it even if the price is high. If a new video game becomes a must-have, its price might not matter much to its fans.
Availability of Raw Materials and Labour: If a business can't get the materials it needs, it can't produce. If a bakery can't find flour, it can't make bread. How might the following article on Increases to Trade Tariffs affect might affect businesses.
https://www.bbc.co.uk/news/articles/cj3j7z73yv2o
Logistics: If getting products to customers is hard, supply might be affected. A clothing company needs efficient transportation to distribute its products.
Ability to Produce Profitably: If making a product costs more than selling it, it's not worth it. If the cost of producing a toy is more than what people are willing to pay, the business might not make it.
Competition for Raw Materials: If many businesses need the same materials, it can drive prices up. If all car manufacturers want the same metal for their cars, the metal's price might rise.
Government Support: If the government helps a business, it can impact supply. If a country encourages solar energy by giving subsidies, solar panel production might increase.
Price Elasticity of Demand: It's like a measure of how sensitive people are to price changes. If people react a lot to price changes, demand is elastic.
Example: If the price of a chocolate bar doubles and people still buy the same amount, demand is inelastic. But if people buy much less chocolate when the price increases, demand is elastic.
In different types of markets, businesses make different pricing and production choices. In a competitive market, prices might be lower due to rivalry, while in a monopoly, the company might set high prices because it's the only one selling.
If a competitor lowers prices, a business might do the same to stay competitive. If a rival offers a sale on laptops, another electronics store might follow suit.
Understanding these concepts helps businesses make smart decisions about what to produce, how much to produce, and at what price. It's like knowing the rules of the game to play it well.
Possible Questions:
Influences on Demand:
1.How can affordability affect demand for a product? Provide an example of a product whose demand might change based on its price.
2.Explain how competition can influence the demand for products. Give an example of how competition might affect the demand for smartphones.
3.What role do substitutes play in influencing demand? Provide an example of a product and its substitute, and how changes in one might affect the demand for the other.
4.How does the level of Gross Domestic Product (GDP) impact consumer spending? Provide an example of how a strong economy might affect the demand for luxury items.
5.How can the needs and aspirations of consumers affect demand? Give an example of a product that people would buy regardless of its price due to their strong desire for it.
Influences on Supply:
6.Why is the availability of raw materials and labor important for supply? Provide an example of a business that relies heavily on specific raw materials for its products.
7.What is the significance of logistics in supply? Explain how transportation challenges can impact a business's ability to supply products to customers.
8.Why is the ability to produce profitably important for supply decisions? Give an example of a situation where high production costs could affect a business's decision to supply a product.
9.How can competition for raw materials influence supply decisions? Provide an example of how an increase in demand for a specific material might impact businesses that use it.
10.Describe how government support can affect supply. Provide an example of a government initiative that encourages businesses to produce a certain type of product.
Elasticity: Price Elasticity of Demand:
11.What does price elasticity of demand measure? Explain the difference between elastic and inelastic demand with examples.
Impact on Pricing and Output Decisions, Responses to Competitors:
12.How do different market structures influence pricing and output decisions for businesses? Provide an example of how pricing might differ in a competitive market compared to a monopoly.
13. If a competitor lowers prices, how might a business respond? Explain how businesses might react to competitors' pricing decisions.