Determinants of demand

Introduction

The guiding question for the lesson is the recognition that while the price of a good or service effects the level of quantity demanded for a product, this is different to the level of demand, which is determined by non price factors − income, tastes ∕ preferences and the price and availability of complementary and substitute products.   

Enquiry question

Why is it that factors such as changes in income, popularity / preference and the price of related goods impact on the level of demand, rather than price.

Lesson notes

Lesson time: 70 minutes

Lesson objectives:

An understanding of which factors influence demand for a good or service and how this can be illustrated on a supply and demand curve.

An understanding of the presumption of ceteris paribus.

Teacher notes:

1. Beginning activity - start the lesson with the opening question. Many of your students my reply that price is a determinate of demand.  (5 minutes)

2. Processes - technical Vocabulary - the students can learn the key concepts through the class handout, which can be printed off and distributed. (5 minutes)

3. Assessment - short answer questions on the determinants of demand. (15 minutes)

4. Assessment - practise questions on the market for milk.  I find that when completing this exercise students will tend to cut corners by drawing the change in supply / demand but not highlight the new equilibrium point, or the new labels. (15 minutes)

5. TOK activity - asking students to reflect on demand for products which are either luxury or perceived to be luxury products.  Is there a difference between what consumers perceive as quality and what producers perceive as such. (10 minutes)

6. Reflection - the role of advertising in determining demand.  What distinguishes a successful advertising campaign from the rest?  After showing the first insurance video, which your classes will love you need to direct the question round to 'But was it successful'? (20 minutes)

1. Beginning activity

Starting with the simple question: 'what determines your demand for a good or service?' 

Surprisingly one of the answer is not price, but instead the following:

  • a change in disposable income levels
  • a change in the price of a substitute product
  • a change in the price of a complimentary good or service
  • a change in the popularity of the product.

Determinants of demand

The following factors determine the demand for a good or service, note that price is not one of them because demand by definition is the quantity of goods and services that consumers are willing and able to purchase - at a given price.

The price and availability of substitute products e.g. Coke and Pepsi

The price of complimentary products, examples of complimentary products include petrol and cars, golf clubs and golf club membership e.t.c.

Tastes and preferences - this is obviously extremely difficult for an economist to quantify but there seems an obvious link between the popularity of a good or service and the level of demand. 

Real income levels - changes in the income of a nation or in the income distribution of a nation will also impact on demand patterns.

The activities on this page are available as a PDF file at:  Determinants of demand

Activity 2

(a) How will a rise in the price of Pepsi effect the demand for Coke?

Following a rise in the price of Pepsi we would expect demand for Coke to rise, ceteris paribus. This is because many consumers would happily switch between the two products and so as the price of Pepsi rises many consumers will instead purchase Coke.

(b) How will a change in price or availability of public transport or new cars impact on the demand for petrol? 

Demand for petrol is influenced by the price and availability of public transport (a substitute good) as well as the price of cars, which is a complimentary good.

(c) Explain the likely impact on demand for bicycles in the UK after Bradley Wiggins followed his Tour de France win, with a gold medal in the time trial at the London Olympics just one week later. 

Bicycle sales in the UK, for instance, spiked sharply.

(d) Explain examples of products where the popularity has grown slowly over time, due to changes in fashion / popularity?

Examples might include the gradual increase in popularity for organic / free range food products, over a decade or more.

(e) How might a good suddenly become more (or less) popular due to a change in the law.

An example might include a large rise in demand for bicycle helmets if a government changed the law requiring their use.  Similarly we would expect to see a sharp in demand for electronic cigarettes if the government changed the law to prohibit their use.

(f)  Why might the demand for certain products rise and fall sharply at certain periods of the year?

Demand for products suitable as gifts will rise sharply over Christmas or other holiday periods and sales of sun tan lotion and beach products are predominantly made during the peak holiday season.  In the USA sales of turkey rise substantially over the 'thanksgiving' holiday, with 88% of American families consuming the bird at this time.

(g) Explain an impact on demand for products when the age profile of a country changes then we might expect to see rises in demand for some products and a fall in the demand for others. 

In the West, for example, with a relatively old and ageing population we may see a rise in demand for certain types of products such as smaller, single floor houses and a fall in demand for products such as skateboards and certain kinds of music.  In LEDCs with young, fast growing populations we might expect to see different demand patterns emerging.

(h) How might changes in income distribution affect demand for different goods and services?

In cases where income levels within a society became more equal, households on low incomes would witness relatively larger rises in disposable incomes, while wealthier households would experience small falls in their relative disposable incomes.  In this case then we might see a rise in demand for certain basic consumer durables and a fall in demand for goods normally consumed by the super rich.

Activity 3: Demand practise activity

Using the information gained from the first video and the handout you have just been given, answer the following questions, which all relate to changes in the market for milk.  Illustrate this change after the following examples:

1. A rise in the popularity of milk products such as milkshakes and ice cream

A right shift (rise) in demand

2. A rise in oil prices

Nio change in the demand curve

3. An advertising campaign by the milk marketing board promoting the health benefits of milk

A right shift (rise) in demand

4. A fall in the popularity of dairy products

A left shift (fall) in demand

5. A fall in milk production costs

No change in demand

6. A rise in the level of the minimum wage in a nation

A right shift (rise) in demand

4.TOK activity linking demand with TOK

1. Is there a difference between a product that consumers perceive to be of good quality and one that businesses know is? What ethical dilemmas does the information advantage businesses have over consumers pose?

Hint:

Much of the response to this question comes down to the question 'what is perceived value'?

Perceived value is what consumers believe the product to be worth which may or may not be the same as what businesses know the true value to be.  Businesses alone understand the true cost of producing a good or service and make sure that they keep this secret from their customers.  Producers will then pursue a marketing strategy designed to create a higher perceived value for their products. 

Therefore the perceived value of the good or service may have little to do with the actual monetary value of the product and instead the value of this good or service is based on it's theoretical ability to fulfil a need and provide satisfaction, which economists refer to as utility.  Clearly goods and services with higher perceived utility can be sold for higher prices than those perceived to have lower utility.

A good example of this exists within the consumer durable market.  Within this industry many products, such as microwaves and coffee makers, have similar production costs from one brand to another.  However, go to your local kitchen accessory store and you will see vast differences in the prices charged by different brands - for very similar products.  We cannot blame the manufacturers for this.  It is just that many consumers are often willing to pay more for certain brands.

2. You and your girl friend / boy friend decide to get married.  The man has got on one knee and proposed and the response was a definitive yes.  It is time to buy the ring.  You have narrowed your purchase down to one of two choices. The first costs $ 10,000 while the second costs $ 500.  Both look identical, even when you look very closely using a magnifying glass.  In fact they are indistinguishable from each other.  Which of these rings do you choose to purchase?

The response again comes down to consumer perception that paying more for certain items results in higher quality and hence greater utility.  The reality is that many of you will have gone for the more expensive option just because of the cost.  Do not worry about this, it is just human nature and you are not alone.  For the record, as of July 2016, the most popular wedding ring sold by Tiffany & Co. was a platinum wedding band, priced at $1,325.  An almost identical ring was on sale from Costco for $399.99 - that is irrational consumption at its worst.

5. Reflection: The role of advertising in determining demand

Advertising is one of the world's premier industries with the best marketing directors earning very large salaries. 

The following list contains some of the most successful advertising campaigns ever made?

1) Nike: Just Do It.  Following this successful campaign in 1988, sales in the now popular sports brand rose from $800 million to $9.2 billion.  What do you think made this slogan so successful?

Hint:

The slogan 'Just Do It' was short and to the point yet encapsulated what many casual exercise goers felt when they were exercising.  Don’t think you can run up the mountain? Just Do It. Don’t want to run a half marathon? Just Do It.

2. Absolut Vodka

Following a successful campaign which lasted 25 years the absolut vodka bottle became the most recognisable drinks bottle in the world. The campaign which comprises over 1,500 separate ads had a dramatic impact on demand for the alcoholic drink.  Prior to the campaign Absolut vodka's market share was just 2.5%.  By the time the campaign finished at the end of 2010 the company was selling 4.5 million cases per year, or half of all imported vodka into the U.S.

Why do you think made this slogan so successful?

The absolut vodka bottle did not look particularly aesthetic initially but was developed and of course the story of the product was told in an interesting way.

3. Volkswagen.  One of the most successful campaigns was 'volkswagen's think small' campaign.  Prior to the campaign many American's were purposely not buying German cars thinking that they were just too small. 

Why was this campaign so successful?

Hint:

Americans always had a propensity to buy large American cars and so were reluctant to buy small German cars.  This campaign worked because it played right into the audience’s expectations, turning a perceived weakness into a strength.

Thailand insurance

Watch the following youtube video and then answer the questions which follow:

1.  What where your overriding emotions when watching this video?

2. Did watching this video make you want to buy life insurance from this company? 

3. If not, what do you believe makes this video successful?  (voted the most popular television advert of 2014).

If you enjoyed the above video, why not watch a similar one from the same company which should generate similar emotions.  Afterwards outline which of the two videos you believe was the more successful in fulfilling its primary objective - to sell insurance.

Hint:

While the first video was voted the best commercial video of 2014 it may not have raised demand for insurance services specifically, given that it is more difficult to make the link between the video and purchasing insurance.  Unless the company was hoping to generate sufficient exposure from the video that a rise in sales would follow.  The second video was better at making this link - the central message being that had the boys mother purchased life insurance then she would have received a payment following the original accident, meaning that she would not have to have worked.

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