Final answer:
Fads cause a short-term surge in demand for a product, leading businesses to adjust supply, pricing, and marketing strategies. As fads are typically short-lived, companies must navigate market dynamics carefully to not overcommit resources. Market dynamics that affect demand include tastes and preferences, income levels, and population changes.
Step-by-step explanation:
1) Effects of Fads on the Market
Fads often lead to a short-term increase in demand for a product as consumers rapidly gain interest in the fad item. Businesses must respond to these market changes by optimizing their supply chains, adjusting pricing strategies, and adapting marketing efforts to capitalize on the heightened desire for the product. While fads generate an uptick in sales, they can also lead to market saturation and a sharp decline in demand once the consumer interest wanes.
2)Business Response to High Demand
Businesses might increase production to meet the huge demand, potentially leading to economies of scale and lower production costs per unit. They might also engage in strategic advertising to sustain interest, and in some cases, deliberately limit supply to maintain the product's perceived value. If demand persists, businesses may innovate by offering variations of the popular product to reach different market segments.
However, the lifecycle of fads is often short, so businesses must be careful not to overextend themselves in response to what may be a temporary surge in demand. Market dynamics such as consumer tastes and preferences, income levels, prices of related goods, and population changes all play a role in shaping demand over time.