Determinants of demand
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.
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 time: 70 minutes
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.
1. Beginning activity
Starting with the simple question: 'what determines your demand for a good or service?'
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
(a) How will a rise in the price of Pepsi effect the demand for Coke?
(b) How will a change in price or availability of public transport or new cars impact on the demand for petrol?
(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.
(d) Explain examples of products where the popularity has grown slowly over time, due to changes in fashion / popularity?
(e) How might a good suddenly become more (or less) popular due to a change in the law.
(f) Why might the demand for certain products rise and fall sharply at certain periods of the year?
(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.
(h) How might changes in income distribution affect demand for different goods and services?
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
2. A rise in oil prices
3. An advertising campaign by the milk marketing board promoting the health benefits of milk
4. A fall in the popularity of dairy products
5. A fall in milk production costs
6. A rise in the level of the minimum wage in a nation
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?
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?
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?
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?
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?
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.