Topic: 1.3 CHANGING BUSINESS

ENVIRONMENT

1.3.3 Business Reaction to Market Changes

Who is a consumer?

An individual who buys products or services for personal use, not for manufacture

or resale. A consumer is someone who can make the decision whether or not to

purchase an item at the store, and someone who can be influenced by marketing

and advertisements. Any time someone goes to a store and purchases a toy, shirt,

beverage, or anything else, they are making that decision as a consumer.

Consumers spend their money on a wide variety of goods and services provided by businesses.

Over a period of time consumers buy different types of goods or services causing a shift in

spending patterns that are notable.

When a large number of consumers want to buy a particular product, businesses see this as an

opportunity to make a profit by producing and selling the product.

Consumer patterns

When the demand for a product increases, other businesses enter the market

producing the same/similar goods resulting in an increase of competition in the market.

Increased competition has positive and negative effects on both consumers and businesses.

Demand and changes in consumer spending

People have needs and want which influences the demand for goods and services to

meet those needs and wants. Not everyone has the money to buy everything they

want, so they must decide on what to spend their money on. In society as a whole,

the ways people spend their money is known as consumer spending patterns.

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The main influences on

demand

Price – generally the higher the price of the product the fewer the consumers.

Income – people will only buy what they can afford dependent on their incomes.

Taste – Consumers will only purchase product they want. This could be dependent on

latest fashion, lifestyle and preference.

Prices of alternative goods – demand for one product may depend on prices of others.

For example, demand for car tires may increase if there is a fall in the price of cars as

this leads to an increase in demand for tires. The change in price of tires would have

little effect on demand for cars.

Others goods (substitutes) such as wheat and maize. If there is an increase in the cost

of wheat, consumers will switch to maize

Size and structure of the population – some countries like the UK and Japan have an

aging population leaving a demand for goods and services to suit them such as medical

and leisure services, walking sticks, meals on wheels and even old people’s homes.

Government policy – certain products may be highly taxed to either control demand,

prohibited by law or even for public health. In the UK cigarettes and alcohol are heavily

taxed in a hope to decrease the demand for medical care on the NHS (state health care

system).

Seasonal – there will only be a demand for Christmas trees during the Christmas period.

2Department of Business /Business Studies/ GIS/ 2014/ Grade10/Notes/ Term 1

Price

Population

Taste

IncomeDeman

d

Seasonal

factors

Government policy

Prices of

other goods

Changes in consumer spending patterns

A key aspect of market demand is that it changes over time that in turn changes the

consumer spending patterns.

What do you think the main factors that cause changes in consumer spending patterns are?

The main factors that cause changes in consumer spending patterns

Fashion

Tastes and preferences (food and drink)

Social trends – more women going to work

Customer concerns – environmental such as ethical clothing

Technology

Law amendments – health and safety

Advertising – this can create or increase demand for a product

Disposable income

Consumer confidence

Competition in the market

Why markets have become more competitive

The buying power of consumers has increased in recent years leading to the ability to

buy more goods and services. In the UK consumers are buying more products than ever

before. This has essentially led to growth in the markets for goods and services.

Improved methods of production and international trade have widened the range of

products available causing markets to grow.

As markets grow, more businesses are set up to supply goods and services in a single market

leading to competition in the market as each business tries to get customers to buy their

product than another.

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The impact of increased competition

As businesses are set up to meet demand and competition in the market increases,

businesses have to respond to its competitors as it can have a significant impact on their

business. Very few businesses have completely unique products therefore several businesses

produce most types of goods and services.

Impact of competition for businesses

A business can that can compete successfully will retain its customers and attract new customers in order to maintain or increase sales.

A business that cannot compete successfully will lose customers and sales to other, more competitive businesses. Profits will fall and could go out of business.

Impact of competition for consumers

The right product – what customers want

The right price – a price consumers are willing and able to pay

The right place – where consumers want and expect to be able to buy the product

The right time – available when consumers want it

What does competition mean to a business?

Producing the right product means investing money in research and development in order to successfully meet customer needs

Employees may need retraining for changes in the production process

Existing stock could become obsolete* and old products could have no value

All of these factors can lead to an increase in costs for the business. If a business is struggling financially it may not be able to afford the changes to be made.

*Obsolete – no longer used, produced or is out of date

Small businesses may be able to respond to changing market conditions more so than its larger competitors. The question is do they have the necessary skills and financial resources to meet the new customer demands?

Benefits of increased competition to consumers

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Time

Produc

t

PlacePrice

Competition provides consumers with a wider choice of products. Suppliers try to persuade consumers to buy their products rather than its competitors.

How do consumers benefit?

Products are affordable

Appeal to them more

Represent better value for money

Better quality

New and improved features

Drawbacks 0f competition for consumers

Businesses might cut costs by reducing quality of materials used.

Smaller producers might not be able to compete against mass-produced products so small businesses could close down limiting choice for consumers. For example supermarket giants versus convenience stores.

Locally based goods and services might be lost to national or international producers. This means traditional products could disappear resulting in regions losing their identity. For example, watch makers in Coventry.

5Department of Business /Business Studies/ GIS/ 2014/ Grade10/Notes/ Term 1