Demand Theory

• Causes of shifts of a demand curve

  • PIRATES
  • P - Population change effect
  • I - Income effect change (change in consumer income)
  • R - Related goods effects (substitutes & complements)
  • A - Advertising effect
  • T - Tastes and preferences of consumer change
  • E - Expectations about future prices or products
  • S - Seasonality
• • A self-fulfilling prophecy is a psychological that occurs when a person's expectations about a situation cause them to act in a way that makes the expected outcome more likely to happen
• Price Elasticity of Demand


  • Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good or service to change its price.
  • PED = (% change in quantity demanded for X) / (% change in price of X)
• Key factors affecting PED


  • Number of close substitutes (most important) Evaluation - Brand loyalty.
  • Cost of switching between products.
  • Degree of necessity or whether the good is a luxury spend.
  • Proportion of income (budget) allocated to spending on the good.
  • Time period allowed for customers to respond following a price change.
  • Whether or not the product is subject to habitual consumption.
  • Peak & off-peak demand.
• Inelastic Demand

  
• Elastic Demand

  
• Coefficients of PED


  • If PED = 0, demand is perfectly price inelastic
  • If PED < 1, demand is price inelastic
  • If PED > 0, demand is price elastic
  • If PED = Infinity, demand is perfectly price elastic