Demand, Supply and Price
In this section we will define the terms demand and supply and consider how they are related to the price of the product or the service being offered to the customer.
Demand
Demand is how much of something people are willing or able to afford to buy at any price. In most cases, the demand for a particular product or service will decrease as the price increases. This is because fewer and fewer people will be able or willing to buy the product or service as the price increases.
The demand curve shows that the volume of demand decreases when the price rises and increases as the price falls.
There are a number of factors that can affect demand for a particular product or service.
Affordability
Demand is about people's desire to buy the product but also their ability to buy it, that is, is the product affordable or not? For example, a buyer might want to buy a Ferrari car but if that's not affordable then that person can't buy the car. In this case, the demand doesn't exist.
The ability to purchase is affected by the salary received by the buyer or the money available to the buyer. If a person receives a pay rise, then the demand for those goods will increase.
Competition
Demand will be affected by the competition available as buyers can purchase the product from another company. For example, if there are two shops selling coffee in a small town and one of the two shops increases its prices, then it’s likely that their customers will move to the other shop to buy their coffee if the coffee is of the same standard.
Businesses try to differentiate themselves from their competitors through branding. The aim is to ensure that customers will be loyal to that brand even if the price is higher than their competitors.
Effect of Complementary Goods
Complementary goods are goods that must be used together. For example, when you buy a printer, you’ll also need to buy ink cartridges for the printer. The same is true when you buy a games console. You’ll also have to buy the games that are compatible with the console. The demand for these goods is affected by the price and therefore also the demand for the complementary goods. For example, if the price of electric cars reduces there will be an increase in the demand for them. This in turn will lead to an increase in demand for the complementary goods, e.g. car charging equipment.
The demand for these goods is affected by substitutes or the other choices that are available. If the customer doesn't use the specific service offered here there will be substitutes, or other choices, available. For example, if you wanted to travel from Cardiff to Holyhead, it would be possible to travel in a car or bus, or it would be possible to travel by train or even fly (in a private jet perhaps!).That is to say, there are a number of substitutes or a number of other choices available for travelling from Cardiff to Holyhead. The more choice the customer has, the greater the effect on demand.
Gross Domestic Product (GDP)
When Gross Domestic Product increases, it usually means that people spend more because the economy is more prosperous. This in turn will increase the demand for goods and services. The opposite will usually be true when Gross Domestic Product decreases.
Consumers' needs and aspirations
Consumers have needs as well as aspiration or desire for owning some special product or service. Some services and goods are an absolute necessity for life such as the provision of water and food. If you need something then you have the aspiration and drive to buy those goods or services. The demand for essential services goods such as water is likely to remain fairly stable. However, the aspiration and desire to buy something special can change as it’s dependent on people's finances, aspiration and individual taste.