Uncontrollable factors

These generally are external or environmental, and include a wide variety of factors whose relative importance varies from one product to another.

a. Income

This is a very important factor affecting quantity demanded for the majority of goods. Although it is expressed numerically there are a number of measurement problems. First of all, economists measure income in a number of different ways. The measure that is usually the most relevant to determining demand is personal disposable income (PDI). Although most governments or governmental agencies publish reliable figures relating to this on a regular basis, these are on a national basis and are therefore only strictly applicable to firms that have national markets. It is the average personal disposable income of the market for the firm that is relevant. There is thus a measurement problem if the firm has only a small market, because of the difficulty in obtaining relevant information; this is easier for national markets, or at least regional markets. In the situation where a firm has a small market, or one that is difficult to identify in terms of geographical area or otherwise, some proxy income variable may have to be used. For example, a shop selling products to just a small area or customer base within London may have to use average income in London as a proxy variable. The relationship with quantity demanded can be direct or inverse depending on whether the product is normal or inferior, as discussed in the previous section.

b. Tastes

These are difficult to define and measure, because they relate to subjective preferences and are multidimensional, just like perceived quality, which they influence. They can vary considerably both intertemporally and inter-spatially. Intertemporal variations are variations over time; these apply especially to products whose demand is affected by fashion. This refers not just to clothes, but to other consumer products like entertainment, food and sports. Examples of products where fashion has caused big increases in demand are micro-scooters, teletubby dolls (Barney dolls in the United States), computer games, adventure sports and Viagra. Of course, demand for these products can also fall rapidly when they go out of fashion, like a yo-yo (another good example). These trends in fashion may be recurrent over time.

Inter-spatial variations are variations from place to place, especially from country to country. Good examples of products where tastes vary from country to country are beer, Coke, ketchup, TV programmes and Marks & Spencer (see Case 3.1). Much of this variation arises because of socio-cultural factors. Of course, tastes are not an entirely uncontrollable factor; firms try to influence tastes through their advertising. Cigarette advertising is an example of this, and this is one factor that causes governments to regulate it. This leads us straight into the next factor.

c. Government policy

This has both micro- and macroeconomic effects. The first of these are considered here. Governments often want to discourage us from buying certain products and sometimes to encourage us to buy more of other products. The reasons for this are examined in Chapter 12. Examples of the first category are cigarettes, alcohol, many other drugs (as opposed to medicines, which are in the second category, even though in practice the distinction may be very difficult to draw), weapons, products whose consumption or production causes environmental damage, and sometimes pornography and foreign goods. Goods in the second category are often their opposites. There are many policy instruments in either case: bans, indirect taxes/subsidies, health warnings, promotion regulations, licences, age restrictions, restrictions on times and places of consumption. It is important to distinguish between policies primarily affecting supply, like the first two, and those affecting demand. The fact that indirect taxes (or subsidies) do not affect demand is explained in the next subsection.

d. Competitive factors

This refers to the marketing mix of competitors. Price is not the only relevant factor here because firms often compete in other ways. This non-price competition occurs particularly in oligopolistic markets, for reasons that will be explained in Chapter 8. An example of this is the competition between Coke and Pepsi, who have a virtual duopoly of the cola market. The competition between them occurs mainly in terms of promotion and distribution.

e. Demographic factors

These refer not only to the size of population, but also to its structure. In particular the ageing of the population affects demand in many ways because older people demand more health services and pensions. This has important implications for government policy and the taxpayer.

f. Climatic factors

Weather, rainfall, temperature and also terrain are important. In Canada, for example, there is a greater demand for snow shovels, snow tyres and chains, salt for the roads and rust-proofing for cars.

g. Seasonal factors

These refer to any regular, repeated pattern in demand. Many products have a demand that varies according to season of the year, like air travel, hotels, car rental, jewellery and restaurants. The latter also has a monthly pattern (more people eat out at the beginning of the month when they have more cash), a weekly pattern (more people eat out at weekends) and a daily pattern. Many products have a daily pattern in demand, for example public transport, electricity, telephone calls and health clubs. This also has implications for pricing; many firms use peak and off-peak pricing. This will be examined in more detail in Chapter 10.

h. Macroeconomic factors

These include income, discussed earlier, and also interest rates, exchange rates, inflation rates and unemployment rates. If interest rates fall, for example, this may affect demand for two reasons: many homeowners have mortgages and the falling interest rate will increase their discretionary income. This is the income that they have available to buy non-necessities. Thus they will buy more of most (normal) goods. In addition, the demand for consumer durables will be increased, since these are often bought on credit and will therefore be in effect cheaper. Government policy obviously affects these macroeconomic factors to some degree.

i. Institutional factors

These include a wide variety of effects; the physical infrastructure of roads, railways and telecommunications is relevant, so are political systems, legal systems, education systems, housing systems, religious systems and family systems. For example, a country that has a poor transportation infrastructure will have a low demand for cars; a country with low literacy levels will have a relatively low demand for newspapers and magazines.

j. Technological factors

These primarily affect supply but also affect demand indirectly; this is best explained with an example. Mobile phones will again serve this purpose. Before the 1980s the concept of a truly mobile phone was still in the realm of science fiction, because the technology was not available. Thus consumers had not taken time to consider the potential of such a product and there was no real demand. As advancing technology made possible smaller, lighter, more effective and cheaper products, consumers had a true chance to evaluate the potential of the product and then demand began to increase accordingly.

Figure 3.8. Change in demand.

k. Price of substitutes and complements

A substitute is a product with similar perceived functions or attributes; cars and public transport are substitutes. If the price of public transport were to rise this would increase the demand for cars, other things being equal. Complementary products are consumed together in some way; cars and petrol are complements. If the price of petrol were to rise this would reduce the demand for cars, other things being equal. Thus in the case of substitutes the relationship is positive, while in the case of complements the relationship is negative.

l. Expectations of changes in any of the above factors

If any factor, controllable or uncontrollable, is expected to change in the future, this can affect current sales. For example, it has been estimated that car sales in the UK in 2000 were 300,000 units lower than they otherwise would have been because prices were expected to fall. Similarly, expectations of changes in income, climate, government policy and competitive factors can all affect current demand.

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