Demand and Law of Demand - Essay Example

Introduction Demand and Law of Demand Demand Structure Types of Consumers Elasti of Demand Introduction ZARA is the flagship brand of the Spanish retail group, Inditex SA, one of the largest retailers in the fashion retail market. The organization has been in the fashion retail business for over 30 years expanding from a single store which opened in 1975 to a present 3518 stores in 38 countries. It has 8 brands, some of which are Pulls & Bears, Missoni Dutti besides their largest selling brand Zara which comprises of 650 stores located in 50 countries. Inditex Group is the largest fashion retailer by sales in Europe1. The retail concept of Zara involves regular creation and rapid replenishment of small batches of new goods. The brand capitalizes on its name and "exclusivity" and creates demand. Our study involves evaluating the laws of demand, how demand is influenced and the types of consumers. Law of Demand A basic principle in economics is that - if something becomes more costly, people will be less likely to buy it and vice versa. This principle is called the 'Law of Demand'. The law of demand states that there is an inverse (or negative) relationship between the price of a good or service and that the quantity of it that consumers are willing to purchase. This inverse relationship means that price and the quantity consumers wish to purchase move in opposite directions. As the price increases, buyers purchase less and as the price decreases, buyers purchase more. The common assumption in understanding demand is the assumption that all factors remaining constant or Ceteris Paribus in Latin. There is an exception to this law of demand which works completely in the opposite direction in terms of luxury goods. The demand for luxury goods decreases when price falls and demand increases when the price of the goods increase. A common assumption by Economists when representing demand of a product is that no single good is absolutely essential, everything can be replaced with something else. When the price of a product increases, people cut back on it and buy substitute goods. The availability of substitutes i.e., the goods that perform similar functions helps explain the price versus demand relationship. The pattern of Demand (The Demand Curve) The demand curve is a representation of the demand of goods in relation to its price and the effect on demand with a change in price. From the table, we can plot a demand curve PRICE () QUANTITY 100 10 80 20 60 30 40 40 20 20 At 100, the quantity of goods sold is 10 units and when the price reduces to 80, the quantity of goods sold is 20. With every reduction in price, the number of units sold increase, thereby showing that influence of price in creating demand. This can be further shown in a graph. Figure 1 The uppermost tip of the 'curve' represents the demand for goods at a high price. The relationship that it shows is lesser quantity of goods demanded at a higher price and as the price reduces, the quantity demanded increases. Point D is when demand for the goods is at its maximum. (Figure 1) The curve that can be drawn, plotting the chart which represents Quantity Demanded in relation to price of the goods is called The Demand Curve. Figure 2 The original price of the product was P1 and the quantity demanded at that price denoted by Q1. An increase in price from P1 to P2 has led to a decrease or contraction in demand from Q1 to Q2. (Figure 2) For the case of luxury goods, like that of ours namely ZARA, the effect is exactly opposite. Which means that when price decreases, the demand for our goods reduce and when the price increases, the demand for our goods increase. Factors affecting demand - There are various factors that affect demand. 1. Disposable Income of Consumers - A change in the disposable income of consumers will lead to a change in demand of goods. With more disposable income, the consumers will spend more which automatically raises demand. 2. Expected future prices - When the consumers expect a change in the future prices of goods, they buy more to stock up in order to save thus influencing demand. 3. Population - The size and make up of the population affects quantity sold thereby indirectly influencing demand. 4. Demonstration Effect - An effect where demand is generated by seeing what others have and consequently buying the same product that you have seen. This effect generally applies to luxury goods e.g., Louis Vuitton bags. 5. Brand Loyalty -Certain consumers prefer to stick to preferred brands which they are loyal to. A change in price here, usually does not affect the demand for the product. This effect is predominant in the case of luxury goods. 6. Change in Price of Substitutes - When the price of 'substitute' goods or goods sold by competitors change, demand gets affected. 7. Change in tastes and preferences - With change in consumer preference, the demand also gets affected. The retail concept of Zara involves regular creation and rapid replenishment of small batches of new goods. This kind of concept influences the Psychology of buyers, who tend to buy products because of exclusivity thus becoming part of a niche clientele. Thus normal pulls and pushes do not affect the demand for Zara's products. Concept of Elasticity of Demand - The concept of elasticity of demand refers to the responsiveness of demand for a commodity to changes in its determinants. The determinants of demand usually are consumer preferences, change in number of consumers, consumer income, prices of related goods and consumer expectations. Economists usually consider three important kinds of elasticity of demand: 1. Price Elasticity of Demand 2. Income Elasticity of Demand 3. Cross Elasticity of Demand. Elasticity of Demand (Ed) = Proportionate change in demand Proportionate change in price Ed = Change in quantity demanded Change in price = Change in demand ( D) Original demand (D) = D P = D x P D P D P = P x D D x P Where P stands for original price, P stands for change in price, D for original demand and D for change in demand. Product Differentiation It is developing unique product differences with the intent to influence demand. There are two ways to measure product differentiation, the left brainer which assumes that the buyers wants and needs can be determined by surveys and the likes and the right brainer approach, which is more intuitive striving to find a unique combination of both functional and expressive or emotional attributes that appeal to buyers. The right brainers tend to deliver exactly what the customer wants thereby proving to be effective and helping to increase demand. In the case of Zara, changing the product line according to the seasons, bringing out newer designs to influence demand is an example of product differentiation. Types of Consumers 1. Impulse buyers - Consumers who buy on the go are called impulse buyers. 2. Price Conscious - One who reacts to price changes and is price conscious. 3. Brand Loyal - One that is loyal to the brand he / she prefers. 4. Quality Conscious - One that is conscious about the quality of the goods he purchases. References Shepherd David and Syzmanski Stefan, Economics for Business Dutta Devangshu, Retail @ the speed of fashion www.3isite.com "Rapid-Fire Fulfillment", Harvard Business Review, Vol. 82, No. 11, November 2004. Read More