Factors Influencing Demand in Business | The Factors Which Lead to a Change in Demand Explained

Summary

This video explores the factors that influence changes in demand for products and services in business. It explains that while price is a key factor, others like substitute and complementary goods, consumer income, advertising, trends, demographics, and external shocks also play a crucial role. Real-world examples are provided, such as Black Friday sales and the impact of the COVID-19 pandemic. The video highlights the importance of understanding these factors to predict demand accurately, ensuring businesses avoid excess stock or missed sales opportunities.

Takeaways

• 📊 Demand refers to consumers' desire to purchase products and services at specific pricing points and times.
• 💸 Overestimating demand can lead to excess stock and wastage, while underestimating it can result in missed sales opportunities.
• 🔄 The law of demand states that lower prices usually lead to higher demand, as seen in events like Black Friday.
• 🏷️ Changes in the price of substitute products impact demand; lower prices from competitors can reduce demand for a business's goods.
• 🤝 Changes in the price of complementary goods can have a domino effect, influencing the demand for both related products.
• 💰 Consumer incomes significantly influence demand, with higher incomes boosting demand for premium goods, and lower incomes increasing demand for basic goods.
• 👗 Changes in consumer tastes, preferences, and trends can cause demand to fluctuate, as seen with fad products like fidget spinners.
• 📣 Advertising and strong branding can help maintain or increase demand, as seen with companies like Apple and Nike.
• 👥 Demographics play a crucial role in demand, with businesses targeting specific groups based on factors like age, gender, and income.
• 🌍 External shocks, such as the COVID-19 pandemic or natural disasters, can drastically reduce demand due to economic instability and changing consumer behavior.
• ❄️ Seasonality affects demand, with certain products seeing higher sales during specific seasons, like ice cream in summer and winter coats in winter.

Q & A

What is the definition of demand in a business context?

In business, demand refers to the consumers' desire to purchase products and services at a specific pricing point and time. It's a critical measure that businesses analyze to estimate how much of their products or services consumers are willing to buy.

Why is it important for businesses to accurately estimate demand?

Accurately estimating demand is crucial because overestimating can lead to excess stock and wastage, costing the business money, while underestimating demand can result in missed sales opportunities as customers want more than the business can supply.

What does the law of demand state?

The law of demand states that the lower the price, the higher the demand. For example, sales events like Black Friday attract large crowds because prices are reduced, which increases demand for products.

What impact does the price of substitute products have on demand?

If a competitor offers a substitute product at a lower price, the demand for the original business's product will likely decrease as consumers switch to the cheaper option. Conversely, if competitors raise their prices, demand may increase for the original business's product as customers seek a more affordable option.

How do changes in the price of complementary goods affect demand?

The price of complementary goods, which are often purchased together (like hot dog buns and hot dog sausages), impacts demand. If the price of one good rises, it may decrease demand for both that product and the complementary product.

How do changes in consumer income affect demand for different types of goods?

As consumer incomes increase, demand for premium or luxury products rises due to higher disposable income. Conversely, when incomes decrease, demand for basic, lower-priced goods tends to increase as consumers become more price-conscious.

What role do consumer tastes, fashions, and preferences play in determining demand?

Consumer tastes, fashions, and preferences can quickly shift, impacting demand. For example, fads like fidget spinners may see a spike in demand, followed by a rapid decline when consumer interests change.

How does advertising and branding influence consumer demand?

Effective advertising and strong branding can increase sustained demand by influencing consumer perceptions and trust. Well-executed marketing campaigns help businesses remain relevant in highly competitive markets, as seen with companies like Apple and Nike.

What is the impact of demographic factors on demand?

Demographic factors such as age, gender, and income level influence demand. Businesses that align their products with the demographics of their target market will experience higher demand. Some businesses create product ranges tailored to different demographic segments, such as McDonald's offering Happy Meals for children.

What are external shocks, and how do they affect demand?

External shocks are unpredictable events that impact the economy, such as natural disasters, stock market crashes, or the Covid-19 pandemic. These events can reduce consumer confidence and disposable income, leading to a significant decline in demand for certain products and services.

How does seasonality affect demand for products and services?

Seasonality refers to how demand changes with the seasons. For example, demand for ice cream or camping gear is higher in the summer, while demand for winter coats and slippers increases in the colder months. Businesses need to manage stock and resources accordingly to meet seasonal demand shifts.

Outlines

00:00

📊 Understanding Demand in Business

This paragraph introduces the concept of demand in business, explaining how the desire of consumers to purchase products and services at specific prices impacts the business. It emphasizes the importance of accurately estimating demand, as overestimating or underestimating it can lead to financial losses. It also introduces the 'law of demand,' which states that lower prices typically lead to higher demand, using sales events like Black Friday as an example. However, it notes that price alone isn't the only factor influencing demand—several other key elements such as substitute prices, complementary goods, consumer incomes, and more, also play a significant role.

05:01

🔄 Influence of Substitutes and Complementary Goods

This paragraph dives deeper into two major factors affecting demand: substitutes and complementary goods. It explains how the price of a substitute product (one that consumers can switch to) can directly decrease demand for a business's offerings. A real-world example is provided with a fast food restaurant losing customers to a competitor offering a promotion. Similarly, complementary goods, which are typically purchased together, also influence demand. For instance, if the price of hot dog buns rises, it may decrease the demand for both buns and hot dog sausages. This illustrates how interconnected products affect one another in the marketplace.

10:02

💰 The Impact of Consumer Income on Demand

Here, the focus shifts to the role of consumer income in shaping demand. As income increases, consumers have more disposable income, leading to a higher demand for premium products like Tesla and Rolex. Conversely, when income decreases, demand for luxury goods falls, and consumers seek more affordable options, benefiting businesses like Aldi and Primark. This section underscores the direct relationship between income levels and changes in consumer purchasing behavior, highlighting how businesses in different market segments are affected by these fluctuations.

👗 Fashions, Tastes, and Preferences

This section explains how consumer preferences, fashions, and tastes influence demand. When a product becomes trendy, demand rises, but tastes can shift quickly, as seen with fads like fidget spinners. Businesses that produce long-lasting products like bread or beans are less affected by trends. To remain relevant, many companies invest in product development and releases to maintain consumer interest and prevent declining demand. It emphasizes the need for businesses to continually innovate to keep up with changing consumer preferences.

📢 Advertising, Branding, and Market Competition

This paragraph explores how businesses can actively shape demand through advertising and branding. Companies like Apple and Nike invest heavily in marketing to sustain demand for their products. The text emphasizes the importance of creating a strong brand presence in competitive markets, as businesses that fail to advertise effectively risk being forgotten. Well-executed marketing campaigns influence consumer behavior, brand loyalty, and trust, which are key to maintaining consistent demand over time.

👥 Demographics and Target Markets

Demographics, such as age, gender, and religion, play a significant role in shaping demand, as businesses often tailor their products to specific groups. The paragraph explains how the alignment between a business's target market and the population’s demographics can boost demand. An example is provided with McDonald’s, which targets both adults and children with different product lines, increasing its market reach. This approach helps businesses meet the needs of a diverse customer base and boosts overall demand for their products.

🌍 External Shocks and Their Effect on Demand

External shocks—unpredictable events such as stock market crashes, the Covid-19 pandemic, or natural disasters—significantly disrupt demand. This section highlights how such shocks cause widespread economic instability, affecting both businesses and consumers. The example of Heathrow Airport, which suffered financial losses due to the pandemic and anticipates years of recovery, illustrates the long-lasting effects of these shocks on demand. Businesses must adapt to these unexpected changes to survive and recover in a post-shock market environment.

🌦️ Seasonality and Business Demand

Seasonal changes also play a crucial role in affecting demand. The paragraph explains how certain products like ice cream and gardening tools experience high demand in warmer months, while items like slippers and winter coats become more popular in colder months. Businesses must plan ahead by increasing stock and staffing levels during peak seasons, while reducing costs during off-seasons to avoid excess inventory and wastage. This strategy helps businesses optimize resources and profitability throughout the year.

🔚 Conclusion: Factors Affecting Demand

The final paragraph wraps up the discussion, summarizing the various factors that influence demand, including price, substitutes, complementary goods, consumer income, trends, advertising, demographics, external shocks, and seasonality. The conclusion encourages viewers to subscribe to the YouTube channel for more business insights, reinforcing the educational value of understanding these concepts.

Keywords

💡Demand

Demand refers to consumers' desire to purchase products or services at a specific price and time. In the video, it is central to business decision-making as it affects inventory management, pricing, and sales forecasting. Overestimating or underestimating demand can lead to excess stock or missed sales opportunities.

💡Substitute products

Substitute products are alternatives that consumers can switch to if a competitor offers a similar product at a better price. The video explains how price changes in substitutes directly affect demand, using the example of a fast-food restaurant losing customers to a competitor with a better pizza promotion.

💡Complementary goods

Complementary goods are products often purchased together, such as hot dog sausages and buns. The video illustrates that a price increase in one complementary good can reduce demand for both, as seen with rising hot dog bun prices potentially lowering demand for sausages.

💡Consumer income

Consumer income influences how much disposable income is available for spending on goods and services. Higher incomes increase demand for premium products, while lower incomes shift demand towards more affordable options. The video mentions businesses like Tesla and Rolex targeting high-income consumers, while Aldi and Primark benefit when incomes decrease.

💡Fashions, tastes, and preferences

Consumer preferences are dynamic and can change due to trends, impacting demand for certain products. The video highlights how businesses must adapt to shifting tastes, using examples like fidget spinners, where demand rapidly soared and then collapsed as consumer preferences changed.

💡Advertising and branding

Advertising and branding help businesses sustain or increase demand by shaping consumer perception and trust. Even well-known brands like Apple and Nike invest heavily in marketing to maintain strong demand for their products, as mentioned in the video.

💡Demographics

Demographics refer to the characteristics of a population, such as age, gender, and income level, which influence the demand for specific products. The video explains that businesses must align their offerings with the demographics of their target market, like McDonald's catering to both children and adults with Happy Meals and main meals.

💡External shocks

External shocks are unpredictable events like pandemics or natural disasters that can drastically affect demand. The video uses the example of the Covid-19 pandemic, which reduced demand for air travel and disrupted business operations, leading to economic instability and lower consumer confidence.

💡Seasonality

Seasonality refers to fluctuations in demand based on the time of year. Products like ice cream and gardening tools see high demand in warmer months, while winter coats and slippers are more in demand during colder seasons. The video emphasizes the importance of managing inventory and staffing according to these seasonal trends.

💡Law of demand

The law of demand states that as the price of a product decreases, demand for it increases. The video provides an example of Black Friday sales, where lowered prices attract large crowds, resulting in a significant surge in demand for discounted products.

Highlights

Demand in business refers to consumers' desire to purchase products and services at specific price points and times.

Estimating demand accurately is crucial as overestimating can lead to excess stock, while underestimating leads to lost revenue opportunities.

The law of demand states that the lower the price, the higher the demand, evident in events like Black Friday.

Businesses must consider factors beyond price, such as substitutes, complementary goods, consumer income, and external shocks when assessing demand.

The price of substitute products directly impacts demand; lower-priced substitutes from competitors can decrease demand for a business's products.

The price of complementary goods also affects demand; an increase in the price of one product can lower demand for both complementary items.

Changes in consumer income have a significant impact on demand, with higher incomes leading to increased demand for premium goods and lower incomes shifting demand toward basic goods.

Consumer tastes, preferences, and fashions are dynamic and can significantly influence demand, with some products rising and falling quickly due to fads.

Advertising and branding play a key role in influencing demand, helping businesses like Apple and Nike maintain strong demand through consistent marketing efforts.

Demographics affect demand based on characteristics like age, gender, and income, and businesses often tailor products to target specific demographic groups.

External shocks, such as the COVID-19 pandemic, can severely disrupt demand by impacting both supply chains and consumer behavior.

Seasonality impacts demand, with products like ice cream and gardening tools experiencing high demand in warmer months, while winter products like coats see higher demand in colder seasons.

To manage seasonal demand, businesses must adjust stock and staffing levels, increasing resources when demand is high and reducing them during low-demand periods.

External factors such as stock market crashes and natural disasters can drastically change demand due to the economic instability they create.

Accurate demand forecasting is essential for avoiding waste, optimizing stock levels, and aligning supply with consumer needs throughout the year.

Transcripts

In business, the demand for products and services can often change over time, which then impacts

other factors such as the price and availability of these products and services.

But what factors lead to a change in demand?

Let’s find out!

In business, the term demand refers to the consumers` desire to purchase products and

services at a specific pricing point and time.

It is a very important measure in business and one that businesses often spend a significant

amount of time and money on to determine the amount of demand there is for their products

and services in the market which they operate within.

It’s important that businesses estimate demand as accurately as possible as overestimating

demand can lead to a lot of excess stock and wastage which costs the business money.

Whereas, underestimating demand can lead to the business missing out on lots of potential

sales revenue as their customers want to buy more than the business can supply.

The law of demand states that the lower the price, the higher the demand will be.

Which is why huge crowds of people attend stores during big sales events such as Black

Friday, prices are slashed and demand for the products and services on offer skyrockets.

But, for a business to anticipate demand accurately, It’s not as simple just analysing the price

of their products and services.

There are several other key factors which a business must considered when trying to

determine the amount of demand there is for their products and services, which include:

Changes in the price of substitutes Changes in the price of complementary goods

Changes in consumer incomes Fashions, tastes and preferences

Advertising and branding Demographics

External shocks Seasonality

Let’s take a look at how each one of these factors influences demand for a business’

goods and services with some real world examples along the way.

Substitute products and services are those which customers can easily switch to and buy

from the competitors of the business instead and the price which competitors charge for

these substitute products and services directly impacts the demand.

For example, if a competitor offers a substitute product at a lower price, whether this be

for a one off sale or a general reduction in their selling prices, it’s likely that

demand will decrease as customers shop with this competitor instead.

In contrast, if competitors increase their prices, then it is likely that the business

will see an increase in demand, as price conscious customers switch to the business to save money.

Imagine that you owned a high street fast food restaurant and a competitor across the

road who has historically had similar prices all of sudden runs a promotion offering customers

to buy one get one free on all pizzas, it’s likely that a lot of your customers would

shop there, and demand would decrease at your business because of this change in price for

a substitute product.

Next up, we’ve got a change in the price of complimentary goods, which are the products

and services that are often purchased together as they complement one another.

For example hot dog sausages and hot dog buns, pasta and pasta sauces, or cereals and milk.

Now, if the price of any one of these goods increases, it’s likely to have a negative

impact on the demand of both the product itself and the one which it compliments.

For example, if the price of hot dog buns rose, this could have a domino effect and

impact the demand for hot dog sausages.

Alternatively, if the price of milk increased, this may cause a decrease in the demand for

cereals as the overall cost for cereal and milk as a breakfast option increases, therefore

consumers may start to seek cheaper alternatives.

The income of consumers in the market which a business operates within has a significant

impact on the demand for their products and services.

As income increases, consumers often have more disposable income meaning they have more

money to spend.

This is typically good for business but especially for those businesses who supply products and

services which could be classed as a more of a premium upmarket option such as Tesla

and Rolex who clearly target a segment of the market which have high earning potential

and a high amount of disposable income.

However, as levels of consumer incomes decrease, so does demand for most products and services

as spending habits change because consumers have less disposable income, and they seek

products and services at the lower end of the market.

Resulting in the demand for premium goods decreasing and the demand for basic good increasing.

This can often be good news for business such as Aldi and Primark as they may see an increase

in demand as more consumers become price conscious and switch to businesses which offer cheaper

products and services.

Even if factors such as selling prices and consumer incomes remain constant, changes

in fashions, tastes, and preferences of consumers will impact demand for products and services.

When a product is deemed fashionable and trendy by consumers in the market, demand increases.

And whilst certain products have stood the test of time and are less likely to be affected

by this factor such as beans, bread, and tea.

Fashions, consumer tastes, and consumer preferences often change very quickly due to societal

pressures.

Which is why many businesses invest heavily in research and development with the aim of

continually improving their products to keep them relevant by releasing upgrades and new

products to regenerate demand.

However, this factor is especially influential for the demand of products which could be

classified as fads such as fidget spinners and loom bands where popularity of these products

soared and so did demand, but before long consumer tastes changed and the next fad came

along, meaning demand disappeared completely.

One strategy a business can use to influence the demand for its products and services positively

is to invest in advertising which helps drive sales and develop a stronger brand name in

the long term.

Businesses such as Apple and Nike are prime examples of this.

Even though they are both very popular with consumers and have very strong brands worldwide,

they invest hundreds of millions of pounds each year to ensure demand for their products

remains high.

As the majority of markets are highly competitive in today’s business world, without investing

in advertising and branding, business can easily be forgotten about.

Whereas businesses who are able to execute well thought out marketing campaigns that

develop a strong brand image are able to effectively increase sustained demand for their products

and services as they influence consumers perception, behaviour, and trust in the business.

Demographics are based on characteristics such as age, gender, race, religion, and sexual

orientation amongst many others.

It’s very common for businesses to segment the market by demographics and have a target

market based on these characteristics.

However, what truly impacts demand is how well the demographics of the population where

the business sells their products and services match the demographics of their target market.

Put simply, the more consumers which match the demographics of the target market, the

higher the demand for their products and services is likely to be.

To increase demand, many businesses now differentiate their product portfolio and have a range of

products which target specific demographics.

For example, alongside its main meals which target the age demographic of teenagers and

adults, McDonald’s also targets children with their happy meal option.

Meaning that McDonald’s can attract a wider audience as it has a product portfolio which

meets the wants and needs of a diverse range of people in every age category which effectively

increases demand for their products.

External shocks are random, unpredictable events which happen outside the domestic economic

system and have a widespread impact on the economy and the demand for goods and services.

Examples of external shocks include stock market crashes, the Covid-19 pandemic, supply

chain issues, and natural disasters such as flooding and severe weather.

All of which impact demand as they cause economic instability as both businesses and consumers

can be impacted by the same external shock.

The Covid-19 pandemic was a major external shock as many businesses faced serious implications

such as restrictions stopping them from trading face to face during the lockdown period in

the UK and once they reopened they had to operate under strict rules.

Businesses also faced severe supply chain issues, consumer confidence hit all time lows,

and levels of disposable income decreased, which ultimately resulted in the demand for

certain products and services to reduce dramatically.

For example, two years after the pandemic started, the boss of Heathrow airport warned

it would take at least another five years for passenger numbers to get back to pre-Covid

levels after the airport reveals Covid losses of £3.4bn and announces a plan to charge

more to handle each passenger in the coming years to support their recovery, which will

further impact demand for flights.

The final factor we are going to discuss is seasonality, which refers to the changing

seasons throughout the year, which naturally impact the demand for products and services.

For example, the demand for products such as ice cream, gardening tools, and camping

equipment is often very high in the spring and summer months when the weather is much

warmer than in the other seasons.

However, consumer demand often decreases severely for these products during the autumn and winter

seasons as the weather starts to turn much colder and this is when the demand for products

such as slippers, winter coats, and theatre tickets typically start to increase.

It’s very important that businesses consider the impact of the changing seasons on the

demand for their products and services to ensure they have sufficient availability and

resources to meet increased consumer demand during the seasons when it is high by increasing

stock and staffing levels.

Then during the seasons where demand is low, the business can focus on reducing costs by

ensuring they don’t overspend on staff and reduce stock levels to meet consumer demand

which helps the business to avoid having excess stock and unnecessary wastage.

So that’s it, a quick fire look at the factors which can lead to a change in demand for a

business’ products and services.

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