Summary
Highlights
The 'F' represents fashion and taste. If a good becomes more fashionable or desirable, demand increases (rightward shift). If it falls out of fashion, demand decreases (leftward shift).
The second 'I' is for interest rates. For goods typically bought with borrowed money (e.g., cars, houses), lower interest rates make borrowing cheaper, increasing demand (rightward shift). Higher interest rates make borrowing more expensive, decreasing demand (leftward shift).
The 'C' stands for the price of complements. A complementary good is often bought with another (e.g., printer ink and printers). If the price of a complement (printers) increases, the demand for the other good (printer ink) will decrease (leftward shift). Conversely, a decrease in the complement's price will increase demand for the other good (rightward shift).
In summary, a movement along the demand curve occurs only when the price of the good itself changes. A shift of the entire demand curve occurs when any non-price factor (PASIFIC) affects demand.
Demand is the quantity of a good or service consumers are willing and able to buy at a given price in a given time period. It must be 'effective', meaning consumers are both willing and able. The Law of Demand states an inverse relationship between price and quantity demanded: as price increases, quantity demanded decreases, and vice versa.
The inverse relationship between price and quantity demanded is illustrated by a downward-sloping demand curve. An increase in price leads to a contraction of demand (moving up the curve), while a decrease in price leads to an extension of demand (moving down the curve). This movement along the curve assumes 'ceteris paribus', meaning all other factors remain unchanged, isolating the effect of price.
The downward slope of the demand curve is explained by two effects. The income effect: as prices rise, the purchasing power of income decreases, leading to less ability to buy. The substitution effect: as prices rise, other goods become more competitive, leading consumers to switch their demand to alternatives.
When non-price factors affect demand, the entire demand curve shifts. An increase in demand shifts the curve to the right, and a decrease shifts it to the left, at the same price. These factors are independent of the good's price.
Using the acronym PASIFIC, the 'P' stands for population. An increase in population generally leads to a rightward shift in the demand curve, while a decrease leads to a leftward shift.
The 'A' in PASIFIC is for advertising. Effective advertising increases willingness to buy, shifting the demand curve to the right. Negative publicity or bad advertising can decrease demand, shifting the curve to the left.
The first 'S' is for the price of substitutes. If the price of a substitute good (like Pepsi for Coke) increases, demand for the original good (Coke) will increase, shifting its demand curve to the right. Conversely, a decrease in a substitute's price will shift the demand for the original good to the left.
The 'I' is for income, which distinguishes between normal and inferior goods. For normal goods, demand increases as income rises (rightward shift) and decreases as income falls (leftward shift). For inferior goods (e.g., fast food), demand decreases as income rises and increases as income falls.