The Market
Unit 1: Marketing and People
The Market
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Demand is the quantity buyers are willing and able to buy at each price over a period, so it is a whole schedule of prices and quantities, not one number.
Demand is the quantity of a good that buyers are willing and able to buy at each price over a period of time. Both halves matter: wanting a product without the money to pay for it is not demand a business can sell into.
Because the quantity is different at every price, demand is a schedule rather than a single figure. Plot it and you get the demand curve, which slopes downward: the lower the price, the more buyers take.
Maji sells cases of its drinks to retailers. At $10 a case retailers would take 600 cases a week; at $20 they would take 300; at $25, only 150. Nothing about the drink changed between those rows — only the price, and therefore the quantity demanded.
Real Example: A supermarket that cuts the price of its own-label cola sells more of it that week. The drink is unchanged and shoppers are unchanged; the quantity demanded moved because the price did.
Exam Matters: A Define (2 marks, WBS11 Appendix 6) requires you to define the term. For demand that means both conditions — willing and able — and a price or period attached. One condition is half a definition.
The good's own price moves you between rows of the same schedule; any of the seven other factors replaces the schedule with a different one.
Two different things are often called "demand rising", and a business that confuses them will misread its own market.
The second is what the specification means by factors leading to a change in demand, and there are seven of them. Each one is a reason buyers would take a different quantity at $16, or at $10, or at any other price you name.
The test is simple. Ask whether the good's own price changed. If it did, the quantity demanded moved and demand did not. If it did not, demand itself has changed.
Real Example: A heatwave and a half-price offer both sell more cold drinks. Only the offer is a price change; the heatwave would have sold more at any price on the list, which is a different thing entirely.
Exam Matters: An Explain (4 marks, WBS11 Appendix 6) requires a brief explanation of cause or effect supported by detail. Naming which of the two changes happened, and why, is the detail that separates cause from restatement.
A substitute is bought instead, so its price moves demand the same way; a complement is bought alongside, so its price moves demand the opposite way.
The first factor the specification lists is changes in the prices of substitutes and complementary goods. Both are other products, and the direction of the effect depends on which kind they are.
The rule to carry is that a substitute's price and your demand move in the same direction, and a complement's price and your demand move in opposite directions. Naming which kind the other product is settles the direction before any diagram is drawn.
For a business this is the factor it can watch most cheaply: a rival's price is published, and a change in it is a change in your own market that you did not cause.
Real Example: Console games are complements to the console. When a console's price falls and more are sold, demand for games on it rises at the prices games were already selling for.
Exam Matters: An Explain (4 marks, WBS11 Appendix 6) needs the direction *and* the reason for it. "Demand rises because the rival is dearer" is a cause; "demand rises" alone is the effect restated.
A rise in incomes raises demand for most goods at every price, but for a few it lowers demand, because buyers leave them as soon as they can afford to.
When consumer incomes rise, buyers can afford more at any given price, so demand for most goods rises at every price. When incomes fall, it drops back.
Not everything moves that way. A small group of goods is bought more when incomes are low and abandoned when they rise, because buyers only ever chose them to save money. A cheap powdered drink mix loses customers to bottled drinks when wages rise.
For a business selling a range, this factor decides which products to push when the region is doing well and which to keep for when it is not.
Real Example: Budget airlines fill seats when money is tight and lose some of those passengers to full-service carriers when incomes rise. The seat is the same; what changed is what buyers can now afford instead.
Exam Matters: An Explain (4 marks, WBS11 Appendix 6) is supported by an example. Saying which kind of good the business sells turns a general rule into an explanation of this firm's demand.
What buyers want changes on its own, and when it does the whole schedule moves without any price, income or rival having changed at all.
The specification lists fashions, tastes and preferences as a factor in its own right. Buyers simply come to want more or less of something, and demand shifts at every price.
These changes usually come from outside the market: health advice, a change in what people eat, a product becoming associated with a group buyers want to belong to. None of them is caused by the business, and none is caused by price.
It is worth separating this from the next factor. A change in tastes happens to a business; advertising is a business trying to cause one.
Real Example: Plant-based milks moved from a specialist product to a supermarket staple as preferences changed. Dairy prices did not have to move for demand to shift between the two.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) requires a chain of reasoning. Naming the factor is the first link, not the answer: the chain runs from the change, through demand at every price, to what the business sees.
Marketing is the one demand factor a business controls: it aims to raise demand at every price, and to make buyers less willing to leave for a cheaper rival.
The specification's fourth factor is marketing, advertising and branding — the only one on the list a business decides for itself. The others happen to it.
Successful marketing does two things at once, and a strong answer separates them:
Branding is the part that lasts. An advertising campaign shifts demand while it runs; a brand that buyers trust keeps the schedule in its new position after the campaign stops, which is why firms spend on both.
It is not free and it is not certain. Marketing is a cost before it is a benefit, and a campaign that does not land leaves the schedule where it was.
Real Example: Sports brands pay to put their logo on teams and athletes. The shoe is not improved by the sponsorship; what is bought alongside it is an association, and buyers pay for that.
Exam Matters: An Assess (10 marks, WBS11 Appendix 6) requires a judgement on the importance of something. For marketing, weigh the shift it buys against its cost and the chance it does not work.
Demographics are the size and make-up of the population, and both matter: more buyers raise demand, and a different mix of buyers changes what is demanded.
Demographics describe the population a business sells to — how many people there are, how old they are, where they live and how households are made up. The specification names it as one factor, but it works in two distinct ways and an answer that gives only one is incomplete.
Migration into a city, a falling birth rate, households becoming smaller — each changes the schedule a business faces without any price moving. These changes are slow, which makes them the easiest factor to plan for and the easiest to ignore until a competitor has planned for it first.
Real Example: Rapid urban growth across many economies has raised demand for small, single-serve packaging, because more households are one or two people rather than five.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) requires a chain. Say which demographic change, which group of buyers it creates or removes, and which of the firm's products their demand lands on.
External shocks are sudden and unplanned; seasonality is a swing the business already knows is coming. Both move demand at every price, and only one can be planned for.
The last two factors on the specification's list are external shocks and seasonality. They look similar on a diagram and are opposites in the boardroom.
An external shock is an event outside the market that changes demand suddenly and was not planned for: a natural disaster, a political crisis, a public health emergency, a sharp change in another country's economy. Demand moves at every price and no one in the business caused it.
Seasonality is a swing in demand that repeats on a known cycle — warm months, festivals, school terms, harvests. Maji sells far more cases in the hot season than the cool one at exactly the same price, every year.
Real Example: Fireworks sellers take most of their orders in a few weeks around national celebrations. The product is available all year at the same price and almost nobody buys it in the quiet months.
Exam Matters: An Assess (10 marks, WBS11 Appendix 6) asks for a judgement on importance. Seasonality and shocks are judged differently precisely because one is predictable, and saying so is the judgement.
Supply is the quantity producers are willing and able to sell at each price over a period, and it rises with price because a higher price covers the cost of producing more.
Supply is the quantity of a good that producers are willing and able to offer for sale at each price over a period of time. It is the seller's side of the same market, and like demand it is a schedule rather than a number.
The supply curve slopes upward. A higher price makes selling more worthwhile, and it also covers the higher cost of squeezing out extra output — overtime, a second shift, a more expensive supplier.
At $10 a case Maji is willing to supply 300 cases a week; at $16, 420; at $20, 500. The rising line is the same fact from three angles: more money per case makes more cases worth making.
Real Example: When coffee prices rise, growers bring older and less productive land back into use. The extra beans cost more to produce, which is exactly why they only appear when the price is high enough to cover it.
Exam Matters: A Define (2 marks, WBS11 Appendix 6) on supply needs willing and able, and a price. Dropping "at each price" leaves a definition that could describe production instead.
Costs are the largest influence on supply: when producing each case becomes dearer, less is worth supplying at every price, and the whole schedule moves left.
The first factor the specification lists for supply is changes in the costs of production — wages, raw materials, energy, transport, rent, borrowing.
The logic runs through what is left over. A producer supplies a case while the price covers the cost of making it. If that cost rises and the price does not, some cases stop being worth making, so less is supplied at every price and the schedule moves left. Falling costs do the reverse.
For a business this is the factor most worth hedging. A firm cannot choose the world price of its inputs, but it can fix some of them in advance by contract.
Real Example: Energy-intensive producers such as glass and aluminium makers cut output when electricity prices rise sharply. The furnaces still work; the cases they would fill stop being worth filling.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) requires the chain. Cost per unit up, margin per unit down, some units no longer worth producing, supply lower at every price — four links, not one.
New technology lowers the cost of producing each unit, so more becomes worth supplying at every price and the supply curve shifts right.
The introduction of new technology works on supply through cost, and it usually works in one direction: down. A faster bottling line, a better yeast, software that plans deliveries — each lets the same output be produced with fewer inputs.
Two qualifications a good answer carries. The technology has to be paid for first, so the shift comes after an outlay that may take years to recover. And it rarely stays exclusive: once rivals adopt it too, supply shifts right across the whole market and the price buyers pay tends to follow it down.
Real Example: Solar panels became dramatically cheaper to manufacture as production methods improved, and far more were supplied at prices that would once have made them uneconomic.
Exam Matters: An Explain (4 marks, WBS11 Appendix 6) needs cause, effect and support. The support here is the cost per unit: naming what falls is what makes the supply shift an explanation rather than an assertion.
An indirect tax adds to the cost of supplying each unit and shifts supply left; a subsidy takes cost away and shifts it right — one lever, pulled both ways.
The specification lists indirect taxes and government subsidies as two separate supply factors. They are worth learning together because the mechanism is identical and only the sign changes.
Governments use both deliberately. A tax on a product is usually intended to reduce how much of it is produced and sold, or to raise revenue from it. A subsidy is usually intended to make something cheaper and more widely available than the market alone would make it.
How much of an indirect tax ends up in the price buyers pay is not fixed. It depends on how buyers respond to a price change, which is what the second half of this section measures.
Real Example: Several governments subsidise electric-vehicle production and tax fuel. Both are supply levers aimed at the same goal from opposite ends.
Exam Matters: An Assess (10 marks, WBS11 Appendix 6) requires a judgement. For an indirect tax that means weighing what it raises against how much output actually falls, which depends on how buyers respond.
An external shock hits the ability to produce rather than the willingness to buy, and because it is unforeseen the supply curve moves before any business can respond.
The last factor on the supply list is external shocks — the same word the demand list uses, working on the other side of the market.
A supply shock damages the ability to produce or to deliver: a drought that ruins a harvest, a strike that stops a port, a conflict that closes a shipping route, a fire at a component plant that half an industry buys from. Supply falls at every price, and it falls without warning.
This is where the two halves of the section meet. A supply shock changes the price buyers face, and how much they cut back when it does is the question the rest of this section answers.
Real Example: When a single container route is blocked, firms far from the blockage find components unavailable at any price they were planning to pay. Nothing about their own production changed.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) requires linked reasoning. Shock, supply lower at every price, buyers moving along an unchanged demand curve, price and quantity where the two now meet.
Put both schedules on one diagram and one price stands out: the price at which the quantity buyers want and the quantity producers offer are exactly the same.
Demand and supply are two answers to the same question — how much at each price — so they belong on one diagram, with price up the side and quantity along the bottom.
At $12 buyers would take 540 cases a week and producers would offer 340: buyers want far more than is available. At $20 buyers would take 300 and producers would offer 500: now there is more on offer than anyone wants. Between those two prices the gap closes, and at $16 the two are the same number — 420 cases a week.
That price does not stay put by accident. Below $16, buyers compete for a quantity that is not there and sellers find they can ask more. Above it, cases sit unsold and sellers accept less. Only at $16 does neither side have a reason to move, which is what the interaction of demand and supply means.
You will meet the standard term for that price — equilibrium — in textbooks and in Economics. This specification asks instead for the interaction of demand and supply, and for the causes and consequences of changes in it.
Real Example: A concert that sells out in minutes was priced below the level that would have matched tickets to buyers; one with rows of empty seats was priced above it. The resale market is buyers and sellers finding the price the box office missed.
Exam Matters: A Construct (4 marks, WBS11 Appendix 6) requires an accurately labelled diagram. Both axes named, both curves labelled, and the price and quantity marked where they meet — a diagram missing its labels has not answered a Construct.
The specification asks you to draw these diagrams, and the marks are in the labelling: both axes, both curves, and the price and quantity where they meet.
The specification asks for the drawing and interpretation of demand and supply diagrams. Drawing one is a skill with a fixed order, and doing it in that order stops the common mistakes.
When a change is being shown, the new curve goes on the same diagram beside the old one and is labelled D₂ or S₂, with an arrow showing which way it moved. The original stays: a shift is only visible against where the curve used to be.
Real Example: A diagram with unlabelled axes could be describing any market at all. The labels are what turn a pair of lines into a statement about a particular good.
Exam Matters: A Construct (4 marks, WBS11 Appendix 6) requires an accurately labelled diagram, and may state which type is wanted or leave you to choose. Label both axes, both curves and both values before adding anything else.
When demand rises, the demand curve moves right along an unchanged supply curve, and both the price and the quantity traded end up higher.
The specification wants these diagrams used to show the causes and consequences of changes in demand and supply. Start with demand, and work in a fixed order: name the cause, move the right curve, read both consequences.
The quantity supplied rises even though supply did not change. That is the part students most often miss: producers are not offering more at each price, they are responding to a higher price by moving up the supply curve they already had.
A fall in demand runs the same way in reverse: the curve moves left, and both the price and the quantity traded fall.
Real Example: When more people move into a city faster than homes are built, rents rise and more properties are let. Nothing made landlords willing to offer more at the old rent; the higher rent did.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) requires a developed chain. Cause, which curve moves and why, the new meeting point, then *both* consequences: a chain that stops at the price has answered half.
When supply falls, the supply curve moves left along an unchanged demand curve, and the price rises while the quantity traded falls — the two move in opposite directions.
A change in supply is drawn the same way and read differently, and the difference is the single most useful thing in this chapter.
Compare that with the demand case. When demand rose, price and quantity moved together; when supply falls, they move in opposite directions. That is how a diagram tells you which curve moved, and it works backwards too: given a price rise and a fall in quantity, the cause was on the supply side.
An increase in supply reverses it again — the curve moves right, the price falls and the quantity traded rises.
Real Example: A poor wheat harvest raises bread prices and reduces the amount sold. Buyers did not want bread any less; there was simply less of it to go round at any price.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) is judged on the links. Naming which curve moved, and using the opposite directions of price and quantity as the evidence for it, is the link that most answers leave out.
PED is the percentage change in quantity demanded divided by the percentage change in price, and both percentages are taken from the original value.
The demand curve says quantity falls when price rises. Price elasticity of demand (PED) says by how much, as one number.
PED is normally negative, because price and quantity demanded move in opposite directions. Keep the minus sign in the working; it is evidence the calculation was done rather than guessed.
Real Example: A firm comparing two years of its own price and sales data is doing exactly this calculation. The arithmetic is the easy part; deciding whether anything else changed in between is the hard part.
Exam Matters: A Calculate (4 marks, WBS11 Appendix 6) requires the calculation to be based on given data, with workings shown. Both percentages written out earn the working; the final value alone is one number with nothing behind it.
Ignore the minus sign and compare the size with 1: above 1 demand is price elastic, below 1 it is price inelastic, and exactly 1 is unitary.
A PED value on its own has not answered anything. The interpretation is the comparison of its size with 1, setting the sign aside.
From $10 PED is −0.5, which is inelastic. From $15 it is −1, which is unitary. From $20 it is −2, which is elastic. Same product, same demand curve, three different answers — because elasticity compares proportions, and a dollar is a much larger proportion of $10 than of $20.
So a firm cannot ask "is our demand elastic?" without saying at which price. The answer changes as it moves up its own demand curve.
Real Example: A medicine with no alternative has demand that barely moves with price. A particular brand of biscuit on a shelf of twenty others has demand that moves a great deal.
Exam Matters: An Explain (4 marks, WBS11 Appendix 6) needs the value, its classification and what it means for this firm. A value with no classification has done the arithmetic and stopped short of the answer.
Every factor behind PED works the same way: it makes going elsewhere, or going without, either easier or harder for the buyer.
The specification asks for the factors influencing price elasticity of demand. There are several, and they are much easier to remember once you see that they are all one idea: how easily can this buyer escape the price rise?
Time sits underneath all the others: a buyer with no alternative today may have found one within a year, and a business that priced on a short-run response can be surprised by the long-run one.
Real Example: When fuel prices rise, most drivers cannot change much in a week. Over several years some change what they drive or where they live, and the same price rise produces a much larger fall in quantity.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) requires developed reasoning. Two factors taken through to what they mean for this firm's pricing is worth more than five named and left.
Total revenue is price times quantity, and PED decides which of the two wins: raising the price raises revenue only when demand is price inelastic.
Total revenue is the price multiplied by the quantity sold, before any cost is taken off. Raising a price always increases the takings per case and always reduces the number of cases. Which effect is larger is exactly what PED measures.
The pattern holds in every market. Where demand is price inelastic, price and total revenue move together. Where it is price elastic, they move in opposite directions. Where PED is exactly −1 — for Maji, at $15 — revenue is at its highest, $6,750, and a move in either direction lowers it.
One warning that a judgement needs: maximum revenue is not maximum profit. Selling more cases costs more to make and deliver, so the price that brings in the most money is not necessarily the price that leaves the most.
Real Example: A transport operator that raises fares on a route with no alternative takes more money from fewer journeys. The same rise on a route with three competitors takes less money than before.
Exam Matters: An Assess (10 marks, WBS11 Appendix 6) requires a judgement on importance. State the PED, then the revenue consequence, then what it leaves out — costs, rivals, and whether the value still holds.
PED tells a business which way to move its price to raise revenue, how much of a cost rise it can pass on, and how much a discount will actually cost it.
The specification asks for the significance of price elasticity of demand to businesses in terms of implications for pricing. This is the point of the whole chapter: a number the firm can act on.
The limits matter as much as the number. PED is measured from past data, it assumes nothing else changes, and a rival free to respond can undo the revenue the calculation predicted.
Real Example: Firms selling a product with few close alternatives raise prices with little loss of volume. Firms selling one of many similar products discount instead, and compete on what is not the price.
Exam Matters: An Evaluate (20 marks, WBS11 Appendix 6) is judged on the weighing. Make the pricing case from the PED value, then set against it the costs, the rivals and the age of the data, then reach a supported judgement.
YED is the percentage change in quantity demanded divided by the percentage change in income — the same fraction as PED with a different cause underneath.
Income elasticity of demand (YED) measures how far demand responds to a change in buyers' incomes rather than to the good's own price.
Unlike PED, the sign here is not almost always the same, and that is what makes it useful: it is the first thing you read, and it classifies the good before the size says anything at all.
Real Example: A firm comparing sales across regions with different average incomes is estimating YED, whether or not it calls it that.
Exam Matters: A Calculate (4 marks, WBS11 Appendix 6) requires workings. Both percentages written out show the method; a bare value cannot be credited for one.
The sign of YED classifies the good: positive means normal, bought more as incomes rise; negative means inferior, bought less as incomes rise.
The specification names this distinction on its own, because it is the first thing a YED value tells a business, and it is read from the sign alone.
Maji sells both. When incomes in the region rose by +8%, sales of the sparkling pressé rose from 250 to 290 cases — a normal good. Sales of the powdered drink mix fell from 400 to 384 — an inferior good, with a YED of −0.5.
"Inferior" is a statement about the income response, not about quality. The mix is not badly made. It is inferior because buyers leave it when they can afford to, and that is the only thing the word means here.
Real Example: Long-distance coach travel loses passengers to air and rail as incomes rise. The coaches did not get worse; the alternatives came within reach.
Exam Matters: A Define (2 marks, WBS11 Appendix 6) on an inferior good needs the income direction, not a judgement about quality: demand falls as income rises.
Read the sign first to classify the good, then the size against 1 to say whether demand is income elastic or income inelastic.
A YED value carries two pieces of information and they are read in order: the sign, then the size.
The two readings answer different questions. The sign says which way sales move with the economy; the size says how violently.
Real Example: Luxury goods sell far more in good years and far less in bad ones. Basic foods barely move either way. Both are normal goods, and the difference between them is the size, not the sign.
Exam Matters: An Explain (4 marks, WBS11 Appendix 6) needs both readings and a consequence. Sign, size, and what it means for this firm is a complete answer; any two of the three is not.
What a good is for decides its YED: necessities stay near zero, goods bought for pleasure or status swing hardest, and cheap substitutes for them go negative.
The specification asks for the factors influencing income elasticity of demand. They come down to what part the good plays in a buyer's life.
That last point is why a business selling in several regions cannot assume one YED covers all of them. The product is identical; the buyers are not.
Real Example: Eating out is one of the first things households add when incomes rise and one of the first they cut when incomes fall. Staple groceries do neither.
Exam Matters: An Analyse (6 marks, WBS11 Appendix 6) requires linked reasoning. Name the factor, say what it does to the sign or the size, and land it on this firm's product.
YED tells a business which of its products will swing with the economy, so it can spread its range across the cycle instead of betting the whole firm on one direction.
The specification asks for the significance of income elasticity of demand to businesses. Where PED is about the price a firm sets, YED is about the economy it cannot set at all.
The same limits apply as to PED. YED is measured from past data, it assumes nothing else moved at the same time, and a change in tastes can overwhelm it entirely.
Real Example: Hotel groups that operate both budget and luxury brands are spreading income elasticity deliberately: the two halves of the business do well in different years.
Exam Matters: An Evaluate (20 marks, WBS11 Appendix 6) is judged on the weighing. Argue the range decision from the YED values, then weigh the limits of the data and what else could move demand, then judge.
Demand is the quantity buyers are willing and able to buy at each price over a period, so it is a whole schedule of prices and quantities, not one number.
The good's own price moves you between rows of the same schedule; any of the seven other factors replaces the schedule with a different one.