Demand

A complementary good is a good that is bought and used together with another (1), so that a rise in the price of one reduces demand for the other — for example printers and ink cartridges (1).

One factor is a change in tastes towards sustainability (Knowledge 1). As consumers become more environmentally conscious, energy-efficient bulbs become more desirable, so demand for BrightHome's bulbs shifts to the right (Application 2). This means BrightHome can sell more at every price, raising its sales volume and revenue, and possibly allowing a higher price (Analysis 1).

Factor 1 — a health trend against sugary drinks. A change in tastes is a condition of demand (Knowledge). If consumers turn against sugar, SunSip's drinks become less desirable, shifting its demand curve left (Application). Fewer are bought at every price, so SunSip's sales and revenue fall and it may be forced to reformulate (Analysis).

Factor 2 — a cheaper substitute. A rival's price cut on a competing drink (a substitute) draws customers away (Knowledge). Because SunSip's drink and the rival's are close substitutes (Application), some SunSip customers switch, again shifting SunSip's demand left and reducing its sales and revenue (Analysis).

The rival's price cut is significant because a close substitute becoming cheaper shifts demand for GadgetGo's handsets to the left: at every price some customers now switch to the cheaper rival, so GadgetGo's unit sales and revenue are likely to fall. In a competitive mid-range market this is a real threat, since buyers there tend to be price-sensitive and compare specifications closely.

However, how significant the impact is depends on several things. It depends on how close a substitute the rival phone really is — if GadgetGo's handsets have distinctive features, a stronger brand or a locked-in ecosystem, fewer customers will switch, limiting the fall. It also depends on how GadgetGo responds: it could match the price cut, protecting unit sales but squeezing its per-handset margin, or hold price and instead differentiate through features, after-sales service or accessory and trade-in bundles to keep customers loyal.

The significance therefore lies not just in the price cut itself but in GadgetGo's exposure and flexibility — a differentiated, loyal customer base makes it a manageable threat, whereas a commoditised position with price-sensitive buyers makes it a serious danger that could erode both unit sales and margins if GadgetGo cannot respond.

Streaming services are a powerful substitute for cinema, so their rise is clearly an important influence on CineMax's demand — but whether it is the most important depends on weighing it against other factors.

Why streaming matters a lot. Cheap, convenient home streaming is a close substitute for a cinema trip. As streaming has improved and spread, it draws customers away, shifting CineMax's demand left — fewer admissions and lower seat-occupancy rates at every ticket price. Because streaming keeps getting cheaper and better, this is a structural, ongoing threat that could steadily erode CineMax's core box-office and concessions sales, making it a strong candidate for the most important factor.

Other factors, though, also drive demand. Income matters: a cinema trip is a discretionary leisure spend, so in a recession admissions fall regardless of streaming, while in a boom they recover. Tastes and the release schedule matter enormously — a run of blockbuster releases can fill auditoriums and lift occupancy even against streaming, whereas a weak slate leaves screens empty. Price and the experience matter too: ticket and concession prices, spend-per-head, and whether CineMax offers something streaming cannot (premium large-format screens, the social experience) strongly affect demand.

Judgement. On balance, streaming is probably the most important long-term structural factor because it permanently expands the substitutes available and keeps improving, so CineMax cannot ignore it. However, in the short run the film release schedule and the economy can swamp the streaming effect, and CineMax's own response — differentiating the in-auditorium experience streaming cannot replicate — can offset it. So streaming is the most important factor CineMax must plan around, but its actual impact on demand depends on how well CineMax differentiates and on cyclical and content factors it does not control.

When demand for FreshFare's products falls, cutting price is one obvious response — but whether it is wise depends on why demand fell, on the product's price elasticity, and on FreshFare's production costs and brand.

The case for cutting price. A price cut is a movement along the new, lower demand curve that can win back sales. If FreshFare's products are price-elastic (many substitutes, price-sensitive shoppers), a lower price causes a more than proportionate rise in quantity, so total revenue rises and FreshFare defends its market share and keeps its production lines running at high capacity utilisation — spreading fixed factory overheads over more units. Cutting price can also deter customers from switching to cheaper rivals during a downturn and help clear perishable stock before it passes its shelf life.

The case against. However, price cutting has serious risks. If FreshFare's demand fell because of a change in tastes (say a health scare) rather than price, a price cut treats the wrong problem — customers don't want the product at any price, so revenue falls anyway. If demand is price-inelastic, cutting price reduces total revenue, because the extra sales don't make up for the lower price. A price cut also squeezes the margin over unit production cost, can trigger a damaging price war with rivals, and may cheapen the brand, making it harder to charge premium prices later. Non-price responses — reformulating the product, advertising to shift demand back right, or launching new product lines — may address the real cause more effectively.

Evaluation. Whether FreshFare should cut price depends on key factors. It depends on the cause of the fall: price cutting suits a fall driven by cheaper rivals, not one driven by tastes or a recession. It depends on PED: only worthwhile if demand is elastic, otherwise revenue drops. It depends on FreshFare's cost base: a low-unit-cost producer with high capacity utilisation can sustain a price cut, a high-cost one cannot. And it depends on the time horizon and brand: a short-term cut to clear perishable stock differs from a permanent repositioning that could erode brand value.

Conclusion. On balance, FreshFare should cut price only when the fall in demand is driven by price/competition and its products are price-elastic and its production costs allow it — then a cut can raise revenue and protect share. Where the fall is due to changing tastes, a recession, or inelastic demand, price cutting would destroy revenue and brand value, so FreshFare is better served by non-price responses — reformulating, advertising to shift demand back, or diversifying its product range. The right response is therefore conditional: diagnose why demand fell first, then choose price or non-price action to match the cause.