Market Analysis Flashcards
(23 cards)
Explain PED
Measures the sensitivity of demand to a change in price. Price elasticity is always negative as the increase in price will lead to a fall in sales and, conversely, a reduction in price will lead to a rise in sales.
PED was helpful to managers by giving them insight into the impact of changing their prices. This helps suggest if it was a good idea or not to change their prices.
Formula: Percentage change in quantity demanded / Percentage change in price
Explain YED
Measures how sensitive demand is to a change in income.
Formula: Percentage change in quantity demanded / Percentage change in income
3 categories of YED
*Normal Goods
*Luxury Goods
*Inferior Goods
Normal Goods
Normal goods – as real incomes increase, the demand for normal goods will also increase positive income elasticity that is less than 1. Examples are matches, lemonade, newspapers.
Luxury Goods
Luxury goods – the demand for luxury goods will grow at a faster rate than the increase in real income that created the change in demand: positive income elasticity that is greater than 1. Examples are holidays abroad, health club membership, sports cars.
Inferior Goods
Inferior goods – these are cheap substitutes of products people prefer to buy when their income is reduced (such as value line baked beans): negative income elasticity.
Price Elastic
- Number is greater than 1.
- This means that a change in price will cause a more than proportional change in the quantity demanded. The level of demand is sensitive to a change in price.
- If the price goes up, the demand falls dramatically.
- If the price goes down, the demand rises dramatically.
- Goods that have lots of substitutes and are in a very competitive market, such as
bread, cereals and chocolate bars. - Luxury goods, goods that can be done without e.g., sport cars, exotic holidays and organic bread.
- Expensive goods that are a big
percentage of income, such as sports cars.
Price Inelastic
- Number is less than 1.
- If a good has inelastic price elasticity of demand, then a change in price causes a less than proportional change in the quantity demanded.
- If the price goes up, the demand falls just a little.
- If the price goes down, the demand increases just a little
- Necessities, such as water, power, petrol and basic foods.
- Addictive goods, such as cigarettes.
- The stronger the branding, the
fewer alternatives (substitutes) are
acceptable to customers. Good branding can therefore make a product more inelastic
Unitary Elastic
- Number is equal to 1.
- If a good has unitary price elasticity of demand, then a change in price will cause an equal and proportional change in the quantity demanded.
Impact on revenue from PED (elastic demand)
If price falls, then businesses see a
greater increase in the quantity demanded. Even though the revenue from each product sold has fallen. As the amount sold has increased more than the decrease
in price, businesses will achieve higher total revenue levels. Businesses can use this information to influence lower pricing strategies. If prices were to decrease, they would see an increase in revenue through more than proportionate sales. However, if price increases, then
quantity demanded will fall more than proportionately, which leads to a fall in revenue.
Impact on revenue from PED
(inelastic demand)
If price falls, then businesses see a
less than proportionate increase in the quantity demanded. Even though sales have increased, the fall in revenue from each item sold is greater than the increase in quantity sold, leading to a fall in total revenue.
Price elasticity and sales revenue
- PED is important when deciding on a pricing strategy. This is because the price of a product affects sales revenue.
- If demand is price elastic, then putting up the price will
lead to a fall in sales revenue. The increase in price will be more than offset by a decrease in sales. Conversely, lowering price when demand is price elastic will lead to
a rise in sales revenue. The fall in price will be more than offset by an increase in sales. - If demand is price inelastic, a rise in price will lead to a rise in sales revenue. A fall in price will lead to a fall in sales revenue.
- Changing the price can therefore affect sales revenue. But the exact effect, and whether it leads to an increase or decrease, depends on the price elasticity
Price elasticity and Profit
- Price elasticity also affects profit. Profit is calculated as sales revenue minus costs. Costs are likely to change with sales. The more that is produced, the higher the costs.
- If demand is price inelastic, a rise in price will lead to lower sales but increased sales revenue, but the lower sales will mean lower variable costs. So, profits will
increase not just from higher sales revenue but also from lower costs. - If demand is price elastic, an increase in sales revenue can be achieved by lowering price and raising sales. But higher sales also mean higher costs. In this situation, higher profits will only occur if the increase in sales
revenue is greater than the increase in costs.
Interpreting results of YED (elastic)
ELASTIC – number is greater than 1 (positive and high) – this means that a change in income causes a more than proportional change in the quantity demanded. This result
usually applies to luxury goods or services. For example, if consumer incomes decrease then this might result in a fall in cruise holidays or designer handbags
Interpreting results of YED (inelastic)
INELASTIC – number is between 0 and 1 (positive and low) – this means that a change in income causes a less than proportional change in the quantity demanded. This result usually applies to normal goods or services. For example, if consumer income increases then this might encourage people to eat more fresh fruits and vegetables, thereby increasing the demand for these goods
Interpreting results of YED (negative)
NEGATIVE – number is less than 0 (negative) – this means that if income rises then demand falls, and vice versa. If income falls then demand rises. This usually applies to inferior goods or services, where superior goods and services are available when a consumer has the money to purchase them. Examples of this includes supermarket own brand products, such as Tesco Value Baked Beans. If consumer income increases, then people may be able to afford Heinz Baked Beans instead. The opposite is that if consumer incomes fall, people might try to cut back on their expenditure and buy cheaper alternatives for the
same type of good or service
Explain market analysis
Market analysis is about collecting and interpreting data about customers and the market so that businesses adopt a relevant marketing strategy. Businesses carry out market research so that they can identify, anticipate and ultimately fulfil the needs and wants of their customers - both existing and potential.
Quantitative Data
Quantitative data allows a business to gather and interpret data to answer questions such as:
* Does a market exist and what is the size of the market for the business’s products and services?
* What are the demographics of the target market?
* What segments exist within the target market?
* Are the segments large enough to be a worthwhile target?
* What is the level of brand awareness that exists in the target market?
* What are customers’ buying habits?
* In what ways is the target market evolving?
Qualitative Data
Qualitative data allows businesses to explore answers to questions such as:
* What are customers’ motivations when purchasing a product?
* What are customers’ views on competitor products?
*What was the impact on viewers’ feelings in response to a visual marketing campaign?
* How did attitudes of existing and potential customers change in response to a marketing strategy?
Example of how data analysis can help a business with their marketing strategy
Data analysis following the collection of data helps to informs a business’ marketing strategy. For example, data might show that disposable incomes of customers are on average falling by 2% a year (quantitative) and that brand loyalty to market leaders is declining (qualitative). Therefore, retailers might use this information to focus more on stocking unbranded goods in their stores that offer better value for money.
The impact on revenue from changes in income (YED)
- Knowing the YED of a product helps a business respond to changing economic situations and allows them to plan.
- If a business knows the income elasticity of demand for its product(s) it can use this information to help develop its strategy and its product portfolio.
- Many UK businesses are likely to focus on normal and luxury products as in general terms the economy tends to grow, and incomes tend to go up. However, in times of recession, where incomes may go down, inferior goods could be profitable for businesses as consumers may cut back on spending and look for cheaper and lower quality products.
What happens if a business is producing inferior goods with a negative YED
Demand will increase during periods of recessions and economic downturns. Therefore, retailers may be advised to advertise their value products. This may attract customers trying to survive on a tight budget. If a business is producing an inferior good and economic growth in the long term is positive, then they should consider diversifying into producing normal goods.
What happens if a business is producing luxury goods with YED of above 1 (positive and high), then this means it is income elastic
This means that demand will be sensitive to changes in income. High economic growth may lead to a boom in sales, but the business should be aware that this boom in sales could come crashing to an end if the economy went into recession. Therefore, businesses should be cautious about over stretching themselves. There may also be a case to diversify.
