Cambridge Syllabus Notes

3.1 The Nature of Marketing – Demand and Supply

Learning Objective

Identify and explain the factors that influence the demand for, and the supply of, the products of a business, and relate these to marketing decisions.

1. Role of Marketing in the Business

Marketing translates corporate objectives (e.g., profit maximisation, market‑share growth, brand reputation) into market‑oriented goals.
It creates value for customers, builds relationships, and helps the business achieve sustainable competitive advantage.
All subsequent analysis of demand, supply, segmentation, etc., is undertaken to support these overarching objectives.

2. Key Economic Concepts

Demand: Quantity of a product that consumers are willing and able to purchase at each possible price.
Supply: Quantity of a product that a business is willing and able to sell at each possible price.
Market equilibrium: The price (P*) and quantity (Q*) where quantity demanded equals quantity supplied.
Price elasticity of demand (PED): Measures how sensitive quantity demanded is to a change in price.
• Elastic demand (|PED| > 1) – large change in quantity for a small price change.
• Inelastic demand (|PED| < 1) – small change in quantity for a price change.
Understanding PED helps decide whether a price increase will raise or reduce total revenue.
Market types:
- Consumer (B2C) market – individuals buying for personal use (e.g., fast‑fashion retailer).
- Industrial (B2B) market – organisations buying for production or resale (e.g., industrial pump supplier).
- Geographic scope – local, national, international.
- Orientation – product‑oriented vs. market‑oriented approaches.

3. Factors Influencing Demand

A change in any of the following shifts the demand curve right (increase) or left (decrease).

Factor	Effect on Demand	Typical Example
Consumer income	↑ for normal goods, ↓ for inferior goods	Higher disposable income → more demand for smartphones (normal); lower income → more demand for instant‑noodles (inferior).
Prices of related goods	↑ for substitutes, ↓ for complements	Price rise in tea → coffee demand rises; price rise in petrol → demand for cars (a complement) falls.
Tastes, preferences & lifestyle trends	↑ or ↓	Health consciousness boosts low‑fat yoghurt; a fashion trend lifts demand for chunky‑sole sneakers.
Population size & demographics	↑ or ↓	Aging population raises demand for mobility aids; a large youth cohort fuels video‑game sales.
Consumer expectations	↑ if higher future price expected; ↓ if lower future price expected	Anticipating a price rise in winter coats leads to earlier purchases.
Government policies	↑ or ↓	Tax on sugary drinks reduces soft‑drink demand; subsidy for electric cars raises their demand.

4. Factors Influencing Supply

A change in any of the following shifts the supply curve right (increase) or left (decrease).

Factor	Effect on Supply	Typical Example
Production costs (wages, raw‑material prices)	↓ if costs rise, ↑ if costs fall	Higher steel prices make car production less profitable, reducing supply.
Technology	↑	Automation in a garment factory raises output at the same price.
Number of sellers in the market	↑ with more firms, ↓ with fewer firms	Entry of new coffee shops adds to total market supply of coffee.
Expectations of future price	↓ if a higher price is expected, ↑ if a lower price is expected	Producers hold back stock to sell later at a higher price, reducing current supply.
Government intervention (taxes, subsidies, regulation)	↑ or ↓	Production tax on cigarettes reduces supply; subsidy for solar panels increases supply.
Weather and natural events	↓ (especially for agriculture, tourism, etc.)	Drought reduces wheat output, lowering supply of bread.
Input availability (e.g., semiconductor chips)	↓ if key inputs become scarce, ↑ if they become abundant	Chip shortage limits smartphone production.

5. Market Equilibrium – Interaction of Demand and Supply

In a competitive market the equilibrium price (P*) and quantity (Q*) are where the demand curve (D) meets the supply curve (S).

Typical linear forms:

Demand: Q_d = a – bP

Supply: Q_s = c + dP

At equilibrium Q_d = Q_s:

a – bP* = c + dP*

Solving gives:

P* = (a – c) / (b + d)

Q* = a – bP*

Suggested Diagram

Labelled demand and supply curves. Show a right‑shift in demand (e.g., higher consumer income) and a right‑shift in supply (e.g., improved technology). Mark the original equilibrium (E₁) and the new equilibrium (E₂) with corresponding prices (P₁, P₂) and quantities (Q₁, Q₂).

6. Market Share & Market Growth

Market share = (Sales of the firm ÷ Total market sales) × 100%
Market growth rate = ((Current period market size – Previous period market size) ÷ Previous period market size) × 100%

Example: If total UK smartphone sales are £5 bn and Company A sells £500 m, its market share is (500 / 5000) × 100 = 10%.

A rise in consumer income shifts the demand curve right, expanding the total market size and giving all firms the opportunity to increase their share – provided they respond effectively.

7. Mass Marketing vs. Niche Marketing

Aspect	Mass Marketing	Niche Marketing
Target market	Large, heterogeneous audience	Small, well‑defined segment
Product strategy	Standardised product with broad appeal	Specialised product tailored to niche needs
Pricing	Economies of scale → lower price	Premium pricing justified by uniqueness
Promotion	Mass media (TV, radio, national campaigns)	Targeted media, direct marketing, specialist events
Examples	Coca‑Cola, Nike (mass‑market lines)	Boutique coffee roaster, high‑performance mountain bikes

8. Market Segmentation

Segmentation divides a market into groups of consumers with similar needs or characteristics.

Segmentation Base	Description	Illustrative Example
Geographic	Region, climate, urban/rural	Winter coats marketed heavily in northern Europe.
Demographic	Age, gender, income, occupation, education, family size	Student discount plans for streaming services.
Psychographic	Lifestyle, values, personality	Eco‑friendly clothing line targeting “green” consumers.
Behavioural	Usage rate, loyalty, occasion, benefits sought	Frequent flyer programmes for business travellers.

Activity suggestion: Using a recent smartphone launch, list at least three segmentation bases and explain how the firm tailors its marketing mix for each segment.

9. Customer Relationship Management (CRM)

CRM systems collect, store, and analyse data on individual customers (purchase history, preferences, feedback).
Purpose: build long‑term relationships, increase customer lifetime value, and enable personalised marketing.
Example: A supermarket loyalty card records buying patterns; the retailer then sends targeted coupons for products the customer buys regularly.

10. Market Research – Foundations for Demand & Supply Decisions

Effective marketing decisions rely on reliable market information.

Research Type	Key Features	Typical Use in Demand‑Supply Analysis
Primary research	Data collected directly (surveys, interviews, focus groups, observations)	Gauge consumer preferences, test price sensitivity (PED), assess reaction to a new product.
Secondary research	Existing data (government statistics, industry reports, competitor publications)	Identify market size, growth trends, input‑cost trends, regulatory changes.
Sampling	Choosing a representative subset of the population; probability vs. non‑probability sampling	Ensures findings can be generalised to the whole market.
Data reliability & validity	Accuracy, consistency, relevance of data	Reduces risk of mis‑interpreting demand shifts or cost changes.
Quantitative vs. qualitative analysis	Quantitative – numerical, statistical (e.g., demand forecasts). Qualitative – non‑numerical insights (e.g., attitudes, motivations).	Quantitative data feeds demand‑supply models; qualitative data explains why trends occur.

11. Linking Economic Analysis to Marketing Decisions

Pricing strategy: Use equilibrium price and PED to decide between penetration pricing, skimming, or value‑based pricing.
Product positioning: Align product attributes with the dominant demand drivers (tastes, demographics, segmentation).
Production & capacity planning: Anticipate supply‑side changes (technology, input costs) to set output levels and inventory policies.
Market entry & expansion: Apply market‑share formulas, growth rates, and segmentation analysis to evaluate attractiveness of new markets.
Risk management: Monitor government policy, weather events, and future‑price expectations; use CRM data to spot early shifts in consumer behaviour.
Research utilisation: Primary and secondary research feed both demand forecasts and supply‑chain decisions, ensuring marketing plans are evidence‑based.

12. Summary

Demand is driven by income, related‑good prices, tastes, demographics, expectations, and government policy.
Supply is affected by production costs, technology, number of sellers, expectations, government intervention, weather, and input availability.
Price elasticity indicates how a price change will affect total revenue and informs pricing tactics.
Any change in these determinants shifts the relevant curve, creating a new market equilibrium.
Market share, growth, segmentation, mass vs. niche approaches, CRM, and robust market research all help a business translate economic analysis into effective marketing strategies.

the factors influencing the demand for and supply of the products of a business