Demand for products and changes in demand

At the same price of $\$12$:

• demand increases from $80$ units to $115$ units (a rightward shift), or
• demand decreases from $115$ units to $80$ units (a leftward shift).

A shift to the right (outward shift) is considered positive because it increases demand. A shift to the left (inward shift) is considered negative because it decreases demand.

The following factors can cause a shift in demand to the left or to the right.

Increase in income for consumers
If customers earn more, they’re likely to spend more; if they earn less, they’re likely to spend less. The effect depends on the type of good:

• For some goods, demand rises when income rises (often called superior or normal goods).
• For other goods, demand can fall when income rises (often called inferior goods).

Example:

When income increases, consumers may buy their own cars; when income decreases, they may rely more on public transport. Keep in mind: these income effects shift demand even if the product’s own price doesn’t change.

Seasonal fluctuations
Many industries have predictable high and low sales periods without changing prices. For example, education product sales may be low in December but high in January and February. Demand changes because of the season, not because of a price change.

Complementary products
Complementary products are used together (for example, cars and wheels/tires). If demand for one product rises, demand for its complement often rises too.

Example:

A car prices fall during a recession and more cars are purchased, demand for car wheels/tires may increase. The wheels/tires aren’t necessarily cheaper — the demand changes because a related product changes.

Substitute products
Substitutes are alternatives customers can switch between. If the price of one product rises, customers may switch to a substitute.

Example:

The price of a BMW increases, some customers might switch to a Benz. During difficult times, customers may prefer cheaper substitutes; when economic conditions are good, customers may prefer premium products.

Notice that the price changes here are for other products, not the product whose demand curve we’re shifting.

Demographic factors
Demand patterns often reflect a country’s population structure. If a country has more children, demand for children’s products tends to increase. If the infant population decreases, demand for infant products tends to decrease.

Natural disasters or diseases
Disasters and disease outbreaks can change demand for certain products.

Example:

April 2020, South Africa had record-low car sales of somewhere between $500$–$600$ cars instead of the usual $4,000$ cars due to COVID-19.

At the time this publication is being written, monkeypox is on the rise, which will likely impact travel and holidays if concerns continue to grow.

Not all products fall in demand during disasters or outbreaks. During the COVID-19 period, streaming platforms like Netflix and Disney saw a sharp rise in subscriptions, and hygienic products like hand sanitizers also rose sharply.

Technological awareness
Marketing has always been important for stimulating demand, but it can be especially effective today because technology makes consumers easier to reach. For example, movie producers often market heavily on platforms like TikTok and YouTube. When many consumers view trailers, demand for movie premieres can increase.

Example:

Which of the following would cause a demand curve for hand sanitizers to shift to the left? Select all that apply.

A. An outbreak of monkeypox has caused more people to buy hand sanitizer.
B. A video trend on social media detailing the side effects of using hand sanitizer.
C. A rise in a new brand that offers a similar product to sanitizer.
D. A minister appearing on national television announcing that a certain outbreak is on the decline.
E. The government enforced into law that all schools should have sanitizers at the entrance.
F. Increase in the price of sanitizer.

Solution:

Elasticity of Demand

This matters for managers because changing price doesn’t just change revenue per unit — it can also change the number of units sold.

There are two methods of calculating price elasticity:

• The average arc method
• The non-average arc method

Interpreting the result

Before calculating elasticity, it helps to know how to interpret the result.

Calculating elasticity

Let’s do an example of calculating elasticity, To calculate elasticity, you need to compare how much price changes with how much quantity demanded changes. This is usually done using percentage changes.

In this example, we are given both the original values and the new values, so we can calculate elasticity directly.

Average and non-average arc method

Use both the average arc method and the non-average arc method to calculate the elasticity of demand of the course content.

Example:

KTA sells educational courses online on its sites and its social media platforms. The research team has gathered some information on the demand pattern of the product, and the current demand is $10,000$ copies sold for $\$100$. Based on the market research, it’s estimated that the demand for the courses will rise to $15,000$ when the price is dropped to $\$80$.

Use both the average arc method and the non-average arc method to calculate the elasticity of demand of the course content.

Average arc method:
The average arc method uses the midpoint of the starting and ending values as the denominator for both quantity and price.

$$\begin{array}{rl}\text{Average quantity}& =\frac{10,000+15,000}{2}\\ & =12,500\\ \text{Average price}& =\frac{100+80}{2}\\ & =90\\ \text{\% change in quantity}& =\frac{15,000-10,000}{12,500}\\ & =0.4\\ \text{\% change in price}& =\frac{80-100}{90}\\ & =-0.22\\ \text{Price elasticity of demand}& =\frac{0.4}{-0.22}\\ & =-1.8\end{array}$$

This means the product is relatively elastic.

Steps taken:

• Identify the original and new quantity ($10,000$ to $15,000$)
• Identify the original and new price ($100$ to $80$)
• Calculate the average quantity and average price
• Find the percentage change in quantity using the average quantity
• Find the percentage change in price using the average price
• Substitute both values into the elasticity formula
• Divide to calculate elasticity

Now let’s use the non-average arc method to calculate elasticity.

Non-average arc method:
The non-average arc method uses the starting values (before the change) as the denominator.

$$\begin{array}{rl}\text{\% change in quantity}& =\frac{15,000-10,000}{10,000}\\ & =0.5\\ \text{\% change in price}& =\frac{80-100}{100}\\ & =-0.2\end{array}$$

$$\begin{array}{rl}\text{Price elasticity of demand}& =\frac{0.5}{-0.2}\end{array}$$

$$\begin{array}{rl}\text{Price elasticity of demand}& =\frac{0.5}{-0.2}\\ & =-2.5\end{array}$$

Steps taken:

• Identify the original and new quantity ($10,000$ to $15,000$)
• Identify the original and new price ($100$ to $80$)
• Find the percentage change in quantity using the starting quantity
• Find the percentage change in price using the starting price
• Substitute both values into the elasticity formula
• Divide to calculate elasticity

A CIMA BA1 question can also ask you to do the reverse calculation, for example asking you to calculate the new quantity demanded.

Example:

KTA’s price elasticity of demand was $-2.5$, and its current demand is $10,000$ units. The current price is $\$100$. If the price was to be dropped to $\$80$, how much would be the quantity demanded?

$$\begin{array}{rl}\text{\% change in price}& =\frac{80-100}{100}\\ & =-0.2\\ & \\ \frac{x}{-0.2}& =-2.5\\ x& =-2.5\times -0.2\\ & =0.5\end{array}$$

The percentage change in quantity demanded is $0.5$ (or $50\%$). Now find the new quantity:

$$\begin{array}{rl}\frac{x-10,000}{10,000}& =0.5\\ x-10,000& =0.5\cdot 10,000\\ x& =(0.5\times 10,000)+10,000\\ & =15,000\text{ copies}\end{array}$$

Steps taken:

• Calculate the percentage change in price
• Use elasticity to find percentage change in quantity
• Apply the change to the original quantity

What causes price elasticity of demand?

Necessities
Necessities tend to have more inelastic demand. That doesn’t mean demand never changes when price changes — it means the percentage change in quantity demanded is relatively small compared with the percentage change in price.

Example:

The price of sugar could fall by $20\%$ while quantity demanded rises by $2\%$. That’s still price inelastic.

Availability of substitutes

• If a product has close substitutes, a price rise can lead to a large drop in quantity demanded because customers switch to alternatives.

In some industries there may be no substitutes. For example, in power industries (e.g., electricity in developing countries), a parastatal company may produce electricity for the whole country. If it raises or lowers price, demand may not change much because there is no competition.

Income spent on a product

• The larger the share of income spent on a product, the more sensitive demand tends to be to price changes. Plane tickets or cruises are expensive, so a $10\%$ price drop can noticeably increase demand. A pen is cheap, so a price rise may not change demand much.

Why managers need to understand price elasticity

Managers need to know when to increase and decrease prices in order to increase the profitability of the organization.

Using the earlier example:

• At $\$100$ and $10,000$ copies: sales revenue $=\$1,000,000$
• At $\$80$ and $15,000$ copies: sales revenue $=\$1,200,000$

The elasticity of demand was $-2.5$, which indicates relatively elastic demand, so the price decrease increased total revenue.

Price elasticity summary

Overall, price elasticity helps managers predict how customers will respond to price changes. By understanding whether demand is elastic or inelastic, managers can make more informed pricing decisions that maximize revenue and avoid unintended losses. Instead of guessing, they can use elasticity to choose pricing strategies that align with how customers actually behave.