What’s it: Demographic refers to a population’s characteristics both in terms of size, structure, population distribution, and change. Some of the critical demographic variables include population density, age, marital status, gender, race, religion, family size, occupation, education level, income, and population mobility.
Importance of demographic variables
There are many reasons why studying demographics is important. Two examples of specific applications are in segmenting markets and calculating economic growth.
Market segmentation. Businesses use several demographic variables to specifically identify product preferences and customer buying behavior. They divide the market into several market segments based on these variables. They then select a commercially viable market segment and focus their marketing efforts on that segment.
Companies develop a marketing strategy and marketing mix according to the characteristics of consumers in the target segment. They adjust pricing, packaging, and service offering strategies. If the marketing strategy is aligned with customer demographics, sales are likely to increase as they can better satisfy customers.
Economic growth. Population structure and its changes can have an impact on social and economic changes. The economy develops to meet human needs. In economic activity, the population acts as a labor supplier and consumer for various goods and services.
As a supplier, labor is an important production factor. In various models, economists use it as the primary determinant of production, in addition to capital. An example is the Solow economic growth model.
In aggregate, we can calculate the labor supply from the total labor force, namely the working-age population (18-64 years) who are currently working or actively looking for work. When the number of labor force increases, it increases the potential output of the economy.
Likewise, the quality of the labor force also contributes to increasing potential output through increased productivity. In this regard, age, education, skills, and labor mobility are important determinants.
As consumers, consumers buy goods and services from businesses. And, in the aggregate, demand from the household sector shapes aggregate demand, apart from business investment and government spending. When demand increases, businesses will increase production and recruit more workers. That, in turn, lowers the unemployment rate and creates more income in the economy.
Examples of critical demographic variables
Several demographic variables are usually of concern to businesses and policymakers. Among others are:
- Total population
- Family size
The population is a measure of the potential supply of labor and a measure of the potential demand for goods and services. Larger populations also have more varied needs and want for goods and services.
Population size contributes to the innovative output. Larger populations allow for more diversity of ideas because of more people. Also, variation in needs and wants drives greater potential demand for innovation.
Productive age individuals provide potential labor services for production. They are also the main drivers of demand for goods and services. In contrast, an aging population tends to put significant pressure on public spendings, such as health care and pensions.
In the aggregate, economists use the dependency ratio to measure the potential effects of population structure changes on social and economic development. This ratio divides the number of children (0-14 years) plus old age (65 years or more) by the working-age population (15-64 years).
The working-age population is economically independent. However, it is not for the other two groups, which require the support of working-age individuals to meet their needs. Children need fees from their parents for school. Older people, when they have no pension, depend on their children to care for them.
An increasing dependency ratio hurts economic growth. Because children and the elderly are not working age, they cannot participate in production activities to earn income. Long story short, in the end, it affects saving, consumption, taxation, and social support needs in the economy.
Women and men have different needs. They also differ in managing and spending money. Gender also describes variations in decision making, whether about personal life, professional life, or even eating or shopping decisions.
In employment, gender diversity benefits businesses because it provides them with a broader talent pool. That, in the end, supports making better business decisions. However, gender discrimination is often present in many businesses.
Income is the primary determinant of demand. Zero income means no money to spend. Income levels also explain variations in needs, tastes, and buying behavior among households.
Income and wealth determine the purchasing power of consumers. Rich people spend money differently from poor people. Each product often has a different customer base, according to the income level of its target consumers. Luxury products target wealthy consumers because they have high purchasing power. Conversely, low-income consumers do not have the purchasing power to buy them.
A household may consist of two people with no children, one child, or many children. Larger sizes require more money and income to meet all the needs of family members.
For businesses, family size is crucial because it affects the potential size of demand. That is a consideration for some businesses such as restaurants because they rely on local demand. The owner may take into account the average size of the family when expanding in an area.
Education affects the quality of the workforce. An educated workforce is easier to acquire new skills. They are more productive and efficient at carrying out tasks that require critical thinking. Besides, their proportion to the total population also affects innovation’s success rate in spreading within companies and the economy.
In consumption, the buyer’s education level also affects purchasing behavior, one of which is for insurance products. Education level is often linked to a variable level of income and employment. Higher levels of education contribute positively to higher incomes and more secure jobs.