CHAPTER 3 Why a consumer’s wealth will change

over time due to income and

Demand and pricing
expenditures?
3.1 Theory of Consumer
It changes due to income that is
Marketing Decision received, expenditures that are made, as
well as changes in the valuations of
• Decisions related to demand and assets.
pricing.
The theory of the consumer posits that a
Types of Marketing Decisions consumer plans her purchases, the
timing of those purchases, and borrowing
 Product
and saving so as maximize the
 Pricing satisfaction she and her household unit
 Place will experience from consumption of
 Promotion goods and services.

Two effects of price changes

What is Marketing? SUBSTITUTION EFFECT
• is an established profession and an • the decrease in sales for a product that
applied academic discipline with a large can be attributed to consumers switching
body of literature. to cheaper alternatives when its price
rises.
• the sum of activities involved in
directing the flow of goods and services • the consumer’s response to a changing
from producers to consumers. price to restore balance in the ratios of
marginal utility to price.
• Marketing’s principal function is to
promote and facilitate exchange. INCOME EFFECT

• equivalent change in purchasing power

Who is the Consumer? • The income effect describes how an
increase in income can change the
• A consumer is someone who makes
quantity of goods that consumers will
consumption decisions for herself or for
demand.
her household unit.
Robert Giffen
• Consumers are limited in how much
they can consume by their wealth. • a Scottish statistician and economist.

• Giffen was born at Strathaven,

Lanarkshire.
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• He entered a solicitor's office in MODELING CONSUMER DEMAND

Glasgow, and while in that city attended
courses at the university. To develop a formal model of consumer:

• “The case of Giffen goods” • I IDENTIFY THE MOST SPECIFIC

REASON OF THE CONSUMERS NEED.
3.2 Is the Theory of the Consumer
Realistic? • IDENTIFY THE DIFFERENT
FACTORS OR VARIABLES FOR
Consumer Theory MEASURING THE DETERMINANTS OF
CONSUMERS.
• the study of how people make financial
decisions based on their particular • THE UNITS OF GOOD CONSUMED
preferences and financial constraints. AND THE VALUE OF DETERMINANTS

Herbert Simon Example:

• He proposed a theory of bounded THE BUSINESS IS SELLING

rationality BROADBAND SERVICES IN THE
COMMUNITY
• He also observed that human beings
may not optimize so much as they THE BUSINESS MANAGER
"satisfice" DETERMINE THE 4 KEYS
DETERMINANT OF DEMAND
3.3 determinants of demand
• THE PRICE THEY CHARGE FOR THE
Controlled by business (Mrketing mix) SERVICES.
 Price • THEIR ADVERTISING EXPENDITURE
 Pricing
 Place • THE PRICE CHARGED BY THE
 Promotion COMPETITION

• THE DISPOSABLE INCOME OF

THEIR POTENTIAL CUSTOMERS
COMPLEMENTARY RELATIONSHIP
THE ESTIMATED EQUATION
• Goods and services that are strongly ( BROADBAND SUBSCRIBERS )
related SERVICES PER MONTH:
DEMAND Q =SERVICE PER MONTH = 25,800
• Is also affected by the demographics of P =PRICE PER MONTH = 800
the population of eligible customer

3.4 Modeling Consumer Demand

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A =ADVERTISING EXPENDITURE PER Forecasting Demand Levels

MONTH = 4
• the process of determining how many
CP = THE PRICE PER MONTH OF products or services a business needs to
COMPETITORS SERVICES = 200 produce or stock in the future.

DIPC = THE DISPOSABLE INCOME • It is used to plan production and

PER CAPITAL = 0.4 marketing effectively.

ASTIMATED THE CONSUMPTION Planning Production Activities

QUANTITY Q FOR SAEFIC
• The report emphasises the importance
VALUES OF P,CP AND DIPC of planning production activities.

Q = 25,800 800(30) ± 4 (5000) ± 200 • This involves identifying the necessary

(25) ± 0.4 (33,000) resources, equipment, and personnel for
production.
= 25,800 24,000 ± 20,000 ± 5,000 ±
13,200 = 40,000 Excess Capacity and Missed
Opportunities
= TOTAL SUBSCRIBERS = 40,000
• This refers to the effects of incorrect
demand forecasts.
3.5 Forecasting demand Adjusting Market Strategy
Identifying the Key Determinants of • Businesses can change their market
Demand
strategy (such as pricing and
• This refers to recognizing the main promotions) to adapt to expected or
factors that drive demand. actual demand.

• These are things that affect how many Uncontrollable Variables

people or customers are interested in a • Some aspects of demand are not within
business's product or service. the control of the business, such as the
Developing Demand Functions state of the economy, consumer
incomes, and actions of other
• a mathematical model that describes companies.
how demand changes based on key
factors. • These are difficult to predict but
essential to anticipate.
• It provides a detailed understanding of
how to create an accurate demand Demand Forecasting Techniques
forecast.

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• The report suggests that demand Own-price Elasticity / Price Elasticity

forecasting can be made more effective
using various techniques such as time • assessing the elasticity of demand
series analysis and casual models. relative to changes in the price of the
good or service
Constructing Scenarios
Price Elastic
• For uncontrollable variables like
competitors' actions or unexpected • a classification of goods and services
for which the percentage change in
events, businesses can create different
scenarios for demand forecasting. quantity is greater than the percentage
change in price
Monitoring and Response
Price inelastic
• After forecasting, it is crucial to
continually monitor events and be • a classification of goods and services
prepared to respond to changes. for which the percentage change in
quantity is less than the percentage
Example: change in price

A company selling umbrellas uses Income Elasticity

demand forecasting to determine how
• the response of demand to changes in
many umbrellas they should prepare for
the next month. By studying demand income
determinants like weather (heavy rain or Cyclic good
hot weather), price, and promotions, they
can take the right steps for their • a good or service for which income
production and supply chain. If they fail elasticity is greater than one; a good or
to do this correctly, they may face service which demand is sensitive to
shortages or have an excess of unsold changes in the business cycle.
umbrellas.
Noncyclic good

• when income elasticity is between zero

3.6 elasticity of demand and one

Elasticity of Demand Countercyclic good

• An alternative approach to measuring • income elasticity is negative

the sensitivity of demand to its
Cross-price elasticity
determinant factors is to assess the ratio
of percentage change in its determinant
factor.

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• a measure of the change in demand for • a selling strategy that charges

one good or service when the price of a customers different prices for the same
substitute or a complement changes product or service based on what the
seller thinks they can get the customer to
Elasticity of Demand
agree to. In pure price discrimination, the
• An alternative approach to measuring seller charges each customer the
the sensitivity of demand to its maximum price they will pay.
determinant factors is to assess the ratio Three types of price descrimination
of percentage change in its determinant
factor. FIRST DEGREE PRICE
DISCRIMINATION
3.7 Consumption Decisions in the
Short Run and the Long Run • involves selling a product at the exact
price that each customer is willing to pay.
Short run Decisions
SECOND DEGREE PRICE
• A consumer decision is considered DISCRIMINATION
short run when her consumption will
occur soon enough to be constrained by • targets groups of consumers with lower
existing household assets, personal prices made possible through bulk
commitments, and know-how buying.

• economists often define the short run THIRD DEGREE PRICE

as the time horizon over which the scale DISCRIMINATION
of an operation is fixed and the only
available business decision is the • sets different prices based on the
number of workers to employ. demographics of subsets of a client
base.
Long run Decisions

• Decisions affecting consumption far

enough into the future so that any such
adjustments can be made are called
long-run decisions.

• The long run is sometimes defined as

the time horizon over which there are no
sunk fixed costs.

3.8 Price Discrimination

Price discrimination

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