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Demand and Supply
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Teaching Business
Demand and Supply
A clear guide to demand and supply in marketing, covering how changes in customer demand, business supply and market conditions can affect price, sales and marketing decisions.
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Created by an experienced Head of Business and examiner
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AQA | Edexcel | Cambridge | Eduqas | WJEC | OCR | GCSE
KEY POINTS
Demand refers to the quantity of a product that customers are willing and able to buy at different prices.
Supply refers to the quantity of a product that businesses are willing and able to sell at different prices.
When demand rises, businesses may be able to charge higher prices or sell more units.
When demand falls, businesses may need to reduce prices, increase promotion or change the product offer.
When supply increases, prices may fall if businesses compete to sell more products.
When supply falls, shortages may occur and prices may rise if demand remains strong.
Market conditions can change because of income, trends, seasonality, competitors, costs, technology and external events.
Demand and supply can help businesses make marketing decisions about price, product availability, promotion and market positioning.
Strong exam answers link demand and supply changes to specific business decisions rather than describing the curves only.
KEY DEFINITION
Demand and Supply
Demand and supply explain how customer willingness to buy and business willingness to sell interact to influence price, sales volume and market conditions.
Main Explanation
Demand and Supply
Demand and supply help businesses understand how markets change. Demand is the amount customers are willing and able to buy at different prices. Supply is the amount businesses are willing and able to sell at different prices.
Businesses use this information when making marketing decisions about price, promotion, stock levels, product availability and market positioning.
Factors Affecting Demand
Demand can be affected by price, income, customer tastes, trends, advertising, seasonality, substitutes and the wider economy.
For example, demand for cold drinks may rise in hot weather. Demand for premium products may fall if customers have less disposable income.
Factors Affecting Supply
Supply can be affected by production costs, labour availability, technology, raw materials, transport, supplier reliability and capacity.
If costs rise, a business may increase prices or reduce supply to protect profit margins. If production becomes cheaper or easier, supply may increase.
Price, Revenue and Profit
If demand is high and supply is limited, prices may rise. If supply is high but demand is weak, prices may fall.
A business may increase prices when demand is strong, but it must consider price elasticity of demand. If customers are price sensitive, a price rise could reduce sales and revenue.
Marketing Decisions
If demand is falling, a business may use advertising, discounts, loyalty schemes or product improvements to encourage sales.
If demand is strong, the business may focus on stock control, product availability, quality and protecting its brand image.
Demand and supply can also affect positioning. A scarce or highly desirable product may be positioned as premium. In a crowded market, a business may need to compete through price, promotion, customer service or differentiation.
Limitations
Demand and supply diagrams are useful, but they are simplified. Real markets are affected by many factors at the same time, including brand loyalty, competitors, regulation, technology and economic conditions.
Businesses should therefore use demand and supply analysis alongside market research, sales data and competitor analysis.
Overall Judgement
Demand and supply help businesses understand market conditions and make better marketing decisions.
The impact of a change in demand or supply depends on factors such as price elasticity, costs, competition, capacity and the type of product being sold.
✎ EXAMINER TIP
Students often describe demand and supply curves without linking them to business decisions. Strong answers explain how a change in demand or supply affects price, sales, revenue, stock, promotion or competitiveness.
KEY FORMULAS(s)
Profit and Profitability Formulas
These key formulas help you calculate different profit measures and profitability ratios used in business.
Gross Profit
Gross profit = Revenue − Cost of sales
The profit made after deducting direct costs.
!
Remember: profit shows how much money has been made, while profitability shows how efficiently revenue is being turned into profit.
DATA TABLE
Income Statement for North Coast Coffee Ltd
This statement shows how revenue is converted into gross profit, operating profit and net profit.
Revenue
£250,000
Output
Fixed Costs
Variable Costs
Total Costs
Revenue
Profit / Loss
0 candles £1,200 £0 £1,200 £0 -£1,200
Net profit is the final profit remaining after all costs and expenses have been deducted from revenue.
How Demand and Supply Affect Price
This chart shows how rising demand or reduced supply can put upward pressure on price. It helps students understand how market conditions can influence pricing and availability.
WORKED EXAMPLE
Worked Example: North Coast Coffee
How many coffees must be sold to break even?
Fixed Costs
£1,800
equity + long-term debt
Break-even output = Fixed costs ÷ Contribution per unit
Contribution per unit = Selling price − Variable cost
£3.50 − £1.10 = £2.40
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Step 1: Calculate contribution
£3.50 − £1.10 = £2.40
Contribution per unit is the amount each coffee contributes towards fixed costs.
BREAK-EVEN OUTPUT:
750 coffees per month
EXAM TIP
Always explain what the number means for the business. Do not just calculate the break-even point.
Demand and Supply in Marketing
This diagram shows how changes in demand and supply can affect price, product availability, promotion and marketing decisions.
APPLICATION
Coastal Scoops
Coastal Scoops sells ice cream, frozen yoghurt and cold drinks from seaside kiosks. Demand for its products changes throughout the year because customer behaviour is affected by weather, tourism and school holidays.
During a hot summer week, demand may increase sharply. More customers may want ice cream and cold drinks, so Coastal Scoops may sell more units and may be able to charge slightly higher prices for popular products. The business may also need to increase stock levels and staffing to avoid long queues or disappointed customers.
Supply is also important. If there are problems with deliveries, ingredients or freezer capacity, Coastal Scoops may not be able to supply enough products even when demand is high. This could reduce sales and damage customer satisfaction if popular flavours sell out.
If demand falls during colder weather, the business may need to adapt its marketing decisions. It could use promotions, introduce hot drinks, reduce opening hours or lower stock orders to avoid waste. This shows how demand and supply affect more than price; they also affect product, place and promotion decisions.
However, Coastal Scoops should not rely only on simple demand and supply assumptions. Managers should use sales data, weather forecasts, local event information and customer feedback before making decisions. Demand and supply help explain the market, but effective marketing still requires judgement.
This independent educational case study is not affiliated with, endorsed by or sponsored by Greggs plc. Any financial figures used alongside this example should be treated as simplified or hypothetical estimates created for teaching purposes.
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ANALYSIS
EXAM FOCUS
Analysis questions require you to examine a business concept or issue in detail, breaking it down into its component parts. You should explain how and why something happens and consider its impact on the business.
How to Approach Analysis Questions
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Identify the key issue or concept
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Break it down
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Explain how and why
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Reach a reasoned conclusion
Read the question carefully and highlight the focus of the analysis.
Consider the different factors, causes or impacts related to the issue.
Provide clear explanations using business terms and links points to context.
Evaluate the overall implications for the business.
Example Analysis Question
North Coast Coffee is considering using break-even analysis before opening a second café.
Advantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Disadvantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Key Exam Tip
If you find it difficult to expand your answer and show the type of depth that an examiner is looking for in a top response, consider using the 'so what' approach.
Tesco carry out market research - so what? - this allows them to better understand customer needs - so what? as a result Tesco can provide goods more likely to sell - so what? - this will increase Tesco profit and ensure higher levels of customer satisfaction - so what? this means that customers are likely to become more loyal to Tesco.
Avoid These Exam Traps
Students often lose marks on calculation and analysis questions by making these mistakes. Watch out for them in your exam!
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Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
2
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
3
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Be precise. Read the question carefully. Show your working.
Small mistakes can cost big marks.
EXAM PRACTICE
Practice Question
Apply your knowledge of profit and profitability to answer this exam-style question.
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MINI CASE STUDY
North Coast Coffee Ltd is a premium coffee business which sells freshly roasted coffee beans through its online store and a small chain of independent cafés. The business has experienced strong sales growth due to increasing demand for high-quality speciality coffee products.
The business generates annual revenue of £250,000. Its cost of sales, including coffee beans, packaging and direct production costs, totals £100,000. North Coast Coffee Ltd also faces operating expenses of £80,000, including marketing, employee wages, rent and administration costs. In addition, the business pays £20,000 in interest and taxation each year.
The owner, Mia Thompson, is reviewing the company’s profitability because rising wage costs and increased competition in the premium coffee market have started to place pressure on operating profit margins. She is considering increasing prices slightly in order to protect profitability while still maintaining customer demand.
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EXAM QUESTION
Analyse the possible reasons for BrightBite’s falling profit margins and evaluate strategies it could use to improve profitability.
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HOW TO ANSWER
P
Point
E
Explain
A
Apply
C
Consequence
H
However...
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MODEL ANSWER
P
Point
Increasing prices could improve the profitability of North Coast Coffee Ltd because each sale would generate a larger amount of revenue and potentially increase profit margins.
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EXAMINER TIP
For full marks, make sure you analyse causes rather than just listing them, and evaluate realistic strategies with clear judgement. THINK: Which strategy would have the biggest impact and why?
CALCULATOR
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Demand and Supply
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