Business Environment Chapter 6 Demand ++

7/29/2019 Business Environment Chapter 6 Demand ++

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Business Environment

Chapter 6 Determinants of Demand


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What decides the Demand

Demand is:

1. how many of a product or service people wish

to buy.

2. the people must be able to buy the thing.

So demand is the desire and ability to buy aproduct/service.

It is not demand if you say you want to buy a

house, but do not have the means to buy it.


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What decides the Demand

1. Price 2. Price of substitute products

3. Price of complementary products

4. Incomes salaries and wages

5. Advertising 6. Demographics population how many people, age,

tastes

7. Outside factors weather

8. Fashions e.g. right now Apple is in demand. 9. Brand image e.g. what people think of the product or

Co e.g. BMW is a good, sporty luxury car.

10. Economy poor economy people save, good economypeople spend more.


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Price

Demand Curve

This shows the relationship between quantity

demanded and price.

Usually the higher the price the less the

demand.

The lower the price the higher the demand.


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Demand Curve


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The Graph

If you notice as the price is at first very high

There are few buyers.

As the price drops they increase.


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Another way to look at it

0

5

10

15

20

25

Categoria 1 Categoria 2 Categoria 3 Categoria 4 Categoria 5 Categoria 6 Categoria 7 Categoria 8 Categoria 9 Categoria

10

Serie 1

Serie 1


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Price elasticity of demand

Price

Serie 1

Colonna10

5

10

15

20

25

1 23

45

67

89

1011

Price

Serie 1

Colonna1

Serie 3


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Changes in demand


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Price Elasticity of demand

A Co will want to know how their customers

will react to a change in price.

Elasticity means how much or how little

change happens when price goes up or down.


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Elasticity of demand Elasticity of Demand =

_% in Quantity Demanded % in Price

= Change

= (Q2 Q1) X 100 Q= Quantity(how many)

(P2 P1) X 100 P= Price

Old price 24 new price 20

Demand =30 New Demand 50


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Example of elasticity

_% in Quantity Demanded % in Price

= (Q2 Q1) X 100

(P2 P1) X 100

(50 30)*100

(24 20)*100

Elasticity= 500%

This product is very elastic!


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Meaning of elasticity

% is >1 Product is very elastic

This means a small change in price will lead to

a bigger change in demand.

Any price increase, will really hurt the Co

A price decrease will really help the Co.


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Meaning of Elasticity

% is =1

This is called unit elasticity.

The demand the same as the price change.


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Meaning of Elasticity

%


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Factors affecting elasticity of demand

1. Income elasticity.

This is a measure of how elastic/inelastic achange in income is to demand.

That is if the person is getting more will he buymore

Or if the person is getting more money will hebuy the same or a little more.


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Formula for Income Elasticity of demand

% in Quantity Demanded

% in Income

e.g. (45 40)*100____(3500 -3500)* 100

= 0.01 = 10%

The income elasticity is inelastic!


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Meaning of Income Elasticity

% is >1 = Very elastic

A small change in income will have a bigeffect on Sales.

If income is elastic.

This means if people get more mony they willbuy more


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Understanding the elasticity of income

% is =1

A change in income is equal to a change inquantity demanded.


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Understanding the elasticity of income

% is


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Cross price elasticity of demand

This means if one products price affects the

price of another.

% in the price of Product X

% in the price of Product Y


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Examples of cross price elasticity

If the % is >1 Then a small change in the price of one will

affect the other

E.g. Butter and margarine.

If the % is

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Business Environment Chapter 6 Demand ++