In the spring of 2022, gas prices in Ontario jumped past two dollars a litre at some stations, and grocery bills climbed month after month. Drivers did not stop driving, but many shoppers switched from name brands to store brands, cooked at home more often and waited for flyers before buying. None of those changes came from an ad campaign. They came from the economy. Marketers do not control the economy, but they must read it, because it decides how much customers can spend, what they are willing to pay and which products suddenly look like good value. This lesson gives you the tools to read it: utility, supply and demand, price elasticity, and a quick scan of the outside environment.
Utility: How Marketing Adds Value
Economists use the word utility for the usefulness or satisfaction a product gives a customer. A product does not become useful just because it exists. A bag of flour in a mill in Saskatchewan is of no use to a baker in Kingston who needs it tomorrow morning in a 2 kg bag. Production creates one kind of utility by turning raw materials into something people can use. Marketing creates the rest: it moves the product to where customers are, has it ready when they want it, makes it possible to own, and tells people it exists. This is the clearest answer to anyone who says marketing adds nothing: without it, a perfectly good product is useless to the customer who never hears about it or cannot get it.
| Utility | What it means | Mainly created by | Canadian example |
|---|---|---|---|
| Form | Changing raw materials into a finished product people can use | Production (marketing research guides what form customers want) | A Niagara winery turns grapes into bottled icewine |
| Time | Having the product available when the customer wants it | Marketing (scheduling, inventory, opening hours) | A Shoppers Drug Mart open until midnight; snow shovels stocked before the first storm |
| Place | Having the product where the customer wants it | Marketing (distribution, store location, delivery) | Ice-cream freezers at a cottage-country gas station; online delivery to a rural address |
| Possession | Making it easy to own or use the product | Marketing (payment options, financing, rental, transfer of ownership) | Accepting tap payments, offering a car lease, or renting skis for a day |
| Information | Telling customers the product exists, what it does and how to use it | Marketing (promotion, labels, websites, salespeople) | A bilingual label with cooking instructions; a demo video for a new phone |
Supply, Demand and Equilibrium
Demand is the quantity of a product customers are willing and able to buy at each possible price. The law of demand says that as price rises, quantity demanded falls, and as price falls, quantity demanded rises. The reasons are practical: at a higher price some people can no longer afford the product, and others switch to a cheaper substitute. Supply is the quantity sellers are willing to offer at each price. The law of supply says that as price rises, quantity supplied rises, because a higher price makes it more profitable to produce and sell more, and it attracts new sellers into the market. Plot both on one graph, with price on the vertical axis and quantity on the horizontal axis, and the demand curve slopes down while the supply curve slopes up.
The point where the two curves cross is the equilibrium: the equilibrium price is the price at which quantity demanded equals quantity supplied. If a seller prices above equilibrium, more is offered than customers want, creating a surplus, and unsold stock pushes the price down through clearance sales. If the price is below equilibrium, customers want more than is available, creating a shortage: lineups, sold-out signs and resale prices well above face value, as happens with popular concert tickets. Be careful with one distinction. A change in the product's own price causes a movement along the demand curve. A change in anything else, such as income, tastes or the price of a related product, shifts the whole curve left or right, so customers want more (or less) at every price.
- Income: higher incomes raise demand for most products
- Tastes and trends: a viral video can shift demand right overnight
- Price of substitutes: if coffee prices jump, demand for tea shifts right
- Price of complements: cheaper game consoles shift demand for games right
- Population and expectations: more residents, or an expected price rise, shift demand right
- Costs of inputs: higher wages or ingredient prices shift supply left
- Technology: faster, cheaper production shifts supply right
- Number of sellers: new competitors entering shift supply right
- Weather and disasters: a poor harvest or wildfire shifts supply left
- Government action: taxes shift supply left; subsidies shift it right
Price Elasticity of Demand
Knowing that demand falls when price rises is not enough. A marketer needs to know how much it falls, because that decides whether a price change raises or lowers total revenue. Price elasticity of demand (PED) measures how sensitive customers are to a price change. Divide the percentage change in quantity demanded by the percentage change in price. Because price and quantity move in opposite directions, the answer is negative, so marketers usually compare its absolute value (the number without the minus sign). In this course, find each percentage change from the original value. The total revenue test is the practical payoff: if demand is elastic, raising the price lowers total revenue; if demand is inelastic, raising the price raises total revenue.
| Type | Absolute value of PED | Why customers react this way | Raise the price and total revenue... |
|---|---|---|---|
| Elastic | Greater than 1 | Many substitutes, a luxury or non-urgent purchase, or a big share of the budget | Falls |
| Unit elastic | Exactly 1 | Quantity changes by the same percentage as price | Stays the same |
| Inelastic | Less than 1 | Few substitutes, a necessity, a habit, or a tiny share of the budget | Rises |
The Economy and the PESTLE Scan
| Economic condition | What consumers tend to do | How marketers respond |
|---|---|---|
| Expansion (growth) | Spend more freely; buy upgrades, travel and luxuries | Launch premium products, raise prices carefully, expand into new markets |
| Recession (two or more quarters of shrinking output is a common rule of thumb) | Delay big purchases, trade down to store brands, hunt for deals | Stress value and durability, offer smaller sizes and private labels, keep loyal customers with service |
| High inflation (prices rising quickly, measured by Statistics Canada's Consumer Price Index) | Notice price increases, compare more, switch brands | Explain price changes honestly, avoid shrinkflation that customers feel tricked by, promote value bundles |
| Rising interest rates (the Bank of Canada raises its policy rate) | Borrowing for cars, homes and furniture costs more, so big-ticket demand falls | Offer in-store financing deals, longer warranties, lower-priced models or leasing |
| Falling interest rates | Borrowing is cheaper, so demand for financed purchases rises | Promote big-ticket items and financing; stock up for higher demand |