The key to a successful implementation of any yield management strategy is getting to know the consumers. Large firms invest tremendous amounts of money on research seeking to characterize their own customers as well as potential consumers. In economic theory, the most useful instrument for characterizing consumer behavior is the demand function. A demand function shows the quantity demanded by an individual, a group, or all the consumers in a given market, as a function of market prices, and some other variables.

Knowing the demand structure is a necessary condition for proper selection of profit-maximizing actions by the firm. But it is not a sufficient condition because the firm must also take cost-of-production considerations into account. Therefore, price decision makers within a firm should properly study the structure of the cost of the service or the product sold by their own firms. They should also distinguish among the different types of costs, particularly between costs associated with a marginal expansion of output and costs associated with investing in infrastructure, research and development (R&D), and capacity.

For this reason, we devote an entire chapter to study the most widely used demand and cost structures. Some readers, particularly readers who took microeconomics courses at a second-year undergraduate level, may be familiar with this material. In general, readers can skip this chapter and use it as a reference for the various concepts whenever necessary.