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IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand

A private life insurer in India launches a heavy television campaign for its term plans. Assuming the campaign is effective and the price of the plan stays unchanged, what is the most likely effect on the demand curve for the plan?

The demand curve shifts to the right. Effective advertising raises awareness and preference at every price, which is a change in a non-price determinant of demand. A movement along the curve would require a change in the product's own price, which is held constant here.

  1. AThe demand curve shifts to the rightCorrect
  2. BThe demand curve shifts to the left
  3. CThere is a movement down along the existing demand curve
  4. DThere is a movement up along the existing demand curve
  5. The demand curve becomes perfectly elastic

Explanation

Effective advertising raises consumers' awareness and preference at every price. This is a change in a non-price determinant of demand, so the whole curve shifts right. A movement along the curve would only occur if the price itself changed.

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