Question

1 a) List at least one (1) substitute for your product. Briefly (1 – 3 sentences) describe how the benefits of the substitute product are similar but not exactly the same as your product. What is the relative power of substitutes in the market?  In other words, is it relatively easy or hard for customers to migrate to a substitute market including going without or making the product oneself?

b) What does the market demand curve look like?  How would you describe the elasticity of demand? What is the relative power of customers in the market?

Answer 1

1. a) Let's assume our product is tea.(1) One substitute for tea is coffee.

Both the products contain caffeine and can give you energy, but they are not exactly similar as coffee contains more caffeine per volume than tea and it is absorbed much more faster into the body whereas tea contains comparatively lesser caffeine per volume and it is absorbed slowly into the body. Also, both tea and coffee tastes different, so while one person may like tea another person can like coffee more, so both the products are similar but not exactly the same.

Substitute products helps consumers to choose from a wide range of products in the market to fulfil a similar need of another product. For example, a person can go from one place to another either by road, railway or by air (lets assume there is no ocean between the two places in an example so going by water is not taken). Now, if a person wants to go faster but at an expense of more costly transportation then he can opt for air, if he wants cheaper mode of transportation but at the expense of more travel time then he can opt for road or railways.

Now, the relative power of substitutes in the market depends on the following conditions:

(1) less price - If the prices of the substitutes are less then more consumers would buy the substitute products.

(2) good quality - if the substitute products are of similar or better quality than the product the consumers are using right now, then there are chances of consumers moving towards the substitute product.

(3) can be easily available - if the substitute products are easily available in large quantities in all the markets and the market reach is good, then more consumers might shift towards the substitute good.

So, if the substitute is of lower price, good quality and easily available in the market then the relative power of the substitute in the market would be high. In other words, with the presence of these 3 core factors, it is relatively easy for a customer to migrate to a substitute market.

b) The summation of all the individual demand curves in the market is shown by the market demand curve. The market demand curve is a downward sloping curve as it shows the inverse relationship between quantity demanded and price i.e. when price falls, more quantity is demanded and vice versa.

Elasticity of demand shows how much the quantity demanded changes when the price of the good changes or a change in the income of the consumer or there is a change in the price of a related commodity.

Now, the relative power of customers in the market depends on the elasticity of the good. If the good is inelastic in nature, there the power of customers is low, as even when the price increases, the quantity demanded would not decrease as much as the price has increased. But if the good is elastic in nature, then the power of customers is high, as when the price would increase or decrease by a small percentage, the quantity demanded would change by a larger percentage.