Edexcel International A Level Business: Meeting customer needs and The market (YBS11) – Revision Notes

These notes condense sections 1.3.1 (Meeting customer needs) and 1.3.2 (The market) of Unit 1, Marketing and people, from the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification, Issue 1, September 2017. For full explanations, use the study guide. Then test yourself with the practice set.

Related: Unit 1 revision notes and the Unit 1 overview guide. Course hub: Edexcel A Level Business. Checklist: printable checklist. Not sure where to start? Try a free diagnostic.

Key definitions

Term	Meaning
Mass market	Large number of customers, standardised product, competitive pricing
Niche market	Small, specialised segment; lower volume, often higher price
Market size	Total sales of all firms, by value or volume
Market share	A firm’s sales as a percentage of market size
Brand	Name, symbol or image that identifies and differentiates a product
Dynamic market	One that changes through technology, tastes, entrants and online selling
Risk	Outcome whose chance can be estimated from data
Uncertainty	Outcome whose chance cannot be reliably estimated
Product orientation	Make what the firm can make, then find buyers
Market orientation	Find out what customers want, then make it
Market map	Chart of competitors on two attributes, showing crowded areas and gaps
Segmentation	Dividing a market into groups with similar characteristics or needs
Competitive advantage	Something that lets a firm outperform rivals persistently
Differentiation	Making a product distinct so it is not a pure price comparison
Adding value	Raising the gap between input cost and selling price

Formulas (standard forms)

Measure	Formula
Market share	firm’s sales / total market sales x 100
Market growth	change in market / original market x 100
PED	% change in quantity demanded / % change in price
YED	% change in quantity demanded / % change in income
Percentage change	(new - old) / old x 100
Total revenue	price x quantity
Stratified sample for a group	group size / population x sample size

Market research in brief

• Purposes: identify and anticipate needs and wants; quantify likely demand; gain insight into consumer behaviour.
• Primary: surveys/questionnaires; focus groups/consumer panels; face-to-face/telephone interviews; product trials/test marketing.
• Secondary: websites/social media; newspapers, magazines, TV, radio; reports; databases.
• Quantitative = numbers (how many). Qualitative = opinions and reasons (why).
• Primary: specific, current, costly, slow. Secondary: cheap, fast, possibly dated or off-target.

Sampling	How it works	Main weakness
Random	Equal chance of selection	May miss small groups
Quota	Fill set numbers from chosen groups	Choice within the quota is not random
Stratified	Groups in proportion, random within each	Needs a list and group information

Method boxes

Market share and growth in steps

1. Share = firm’s sales / market sales x 100.
2. Growth = (new market - old market) / old market x 100.
3. Compare the firm’s growth with the market’s: if the firm grows more slowly, its share falls.

Reminder. Pallister Coffee has a £4.0m market that grows to £4.4m: growth = 0.4 / 4.0 x 100 = 10%.

PED in steps

1. Work out % change in price and in quantity (use the original figure as the base).
2. Divide quantity change by price change.
3. Ignore the sign for size: above 1 elastic, below 1 inelastic, equal to 1 unitary.
4. Link to revenue: price x quantity before and after.

Reminder. Pallister cuts a pack from £2.50 to £2.00 (-20%) and sales rise from 8,000 to 9,200 (+15%). PED = 15 / -20 = -0.75, inelastic. Revenue falls from £20,000 to £18,400. Cutting price on inelastic demand lowers revenue.

YED in steps

1. % change in quantity / % change in income.
2. Positive = normal good (above 1 income elastic, between 0 and 1 income inelastic). Negative = inferior good.

Demand and supply at a glance

Shifts demand	Direction
Substitute’s price rises	Demand rises
Complement’s price rises	Demand falls
Incomes rise (normal good)	Demand rises
Fashion, taste, advertising, branding move in favour	Demand rises
Demographic change (for example more elderly people)	Depends on product
External shock, seasonality	Depends on event/season

Shifts supply	Direction
Lower production costs	Supply rises
New technology	Supply rises (usually lower costs)
Indirect tax introduced or raised	Supply falls
Government subsidy	Supply rises
External shock (for example a crop failure)	Supply falls

• Equilibrium: quantity demanded = quantity supplied.
• Demand shifts right: price and quantity both rise. Supply shifts right: price falls, quantity rises. Supply shifts left: price rises, quantity falls.
• A change in the product’s own price is a movement along the curve, not a shift.
• When asked to interpret a diagram: name the curve that shifted, state the direction, give the new equilibrium, and apply it to the business.

Influences on elasticity

PED is lower (less elastic) when…	PED is higher (more elastic) when…
Few close substitutes	Many close substitutes
Necessity	Luxury
Small share of income	Large share of income
Strong brand loyalty	Weak brand loyalty
Short time period	Long time period

For YED, the main influence is how far the good is a necessity or a luxury, and whether cheaper alternatives are available as incomes change.

Business significance. With inelastic demand, price rises lift revenue, so firms differentiate and build brands. With elastic demand, price cuts can lift revenue, but profit depends on costs. High-YED products are hit hardest in a downturn, and inferior goods may gain when incomes fall.

Markets, positioning and competition

• Mass vs niche: compare customer numbers, price levels, competition and how easily a firm can be replaced. Niche firms often earn higher margins on lower volume but depend on a narrow customer base.
• Brands: support higher prices and loyalty, and make demand less price elastic.
• Dynamic markets: online retailing, how markets change, innovation and market growth, and adapting to change. Innovation can open new demand; adapting means watching the market and updating products, channels and costs.
• Competition affects price, quality, service and margins. More close rivals limit pricing power.
• Positioning: choose product or market orientation; plot rivals on a market map; segment the market; build a competitive advantage (cost, brand, service or uniqueness); use differentiation to avoid pure price comparison; add value through design, service and convenience.
• Evaluation prompts: how reliable is the data, how long will the advantage last, what will rivals do, and how large is the segment?

Worked reminders

A firm raises price 5% and quantity falls 10%. PED = -10 / 5 = -2, elastic, so total revenue falls.

A firm’s sales grow 6% while its market grows 10%. Its share is falling, even though sales are rising.

A quota sample of 100 asks 50 men and 50 women. It matches the target mix but the interviewer chooses who answers, so bias is still possible.

Must-know distinctions

• Market size vs market share.
• Risk (estimable) vs uncertainty (not estimable).
• Primary vs secondary; quantitative vs qualitative.
• Product vs market orientation.
• Movement along vs shift of a curve.
• PED (price) vs YED (income). Only YED’s sign is used to classify goods.
• Revenue vs profit.

Quick self-test

1. Sales of £0.45m in a £5.0m market: what is the market share?
2. A market grows from £4.0m to £4.4m. State the growth rate.
3. Give one difference between random and quota sampling.
4. Define market orientation.
5. A price rise of 8% cuts quantity by 4%. Calculate PED and state whether it is elastic.
6. Income rises 8% and demand rises 4%. Calculate YED and classify.
7. State two factors that shift the supply curve to the left.
8. Why can a gap on a market map be a poor opportunity?
9. A stratified sample of 60 is drawn from 1,500 customers, 300 of whom are over 60. How many over-60s are in the sample?
10. Explain why a strong brand may make demand less price elastic.

Answers

1. 0.45 / 5.0 x 100 = 9%.
2. 0.4 / 4.0 x 100 = 10%.
3. In random sampling every member has an equal chance; in quota sampling the interviewer fills set numbers from chosen groups, so selection within each group is not random.
4. Starting with what customers want, found through research, then designing the product to meet it.
5. -4 / 8 = -0.5; inelastic (size below 1).
6. 4 / 8 = +0.5; normal good, income inelastic.
7. For example a rise in production costs, an indirect tax, removal of a subsidy, or a negative external shock.
8. There may be no demand at that combination of attributes, or serving it may be unprofitable.
9. 300 / 1,500 x 60 = 12.
10. Loyal customers see the branded product as different, so they are less willing to switch to substitutes when its price rises, so quantity falls proportionally less than price.

Where marks are usually lost

• Writing “turnover” or “profit” for sales revenue, or confusing revenue with profit.
• Using the new figure instead of the original as the base for percentage changes.
• Forgetting that PED is normally negative, or reporting the sign when asked for size.
• Dropping the sign on YED and so missing an inferior good.
• Treating a change in the product’s own price as a shift of its demand curve.
• Listing research methods without saying why one suits the case.
• Treating risk and uncertainty as the same.
• Giving generic answers that do not use the figures or context in the source.
• Stopping at a calculation without saying what it means for the business.

Frequently asked questions

How do you calculate price elasticity of demand? PED is the percentage change in quantity demanded divided by the percentage change in price. It is normally negative; ignoring the sign, a value above 1 is elastic and below 1 is inelastic.

What is the difference between random, quota and stratified sampling? Random sampling gives every member an equal chance of selection. Quota sampling fills set numbers from chosen groups, which is quick but open to bias. Stratified sampling splits the population into groups and draws randomly from each in proportion to its size.

How does PED affect total revenue? If demand is elastic, a price rise lowers total revenue and a price cut raises it. If demand is inelastic, a price rise raises total revenue and a price cut lowers it.

What is the difference between market size and market share? Market size is the total sales of all firms in the market, by value or volume. Market share is one firm’s sales as a percentage of total market sales.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business, specification Issue 1, September 2017 (Pearson Education Limited), Unit 1, sections 1.3.1 and 1.3.2.