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Home » Economics Homework Help » Microeconomics Help » Advertising Effects
Advertising Effects
As a result of advertising expenditure demand for the product increases, that is, demand curve shifts to the right, for the sake of convenience, we have assumed that the new demand curves after advertising is undertaken are parallel to the old one, though in actual practice it need not to be so. However, in this connection it is useful to consider whether when the demand increases and demand curve shifts to the right, elasticity of demand at each price remains the same, declines or rises. The purpose of competitive advertising or other forms of selling costs is to influence the customers to buy a particular brand of the product rather than other substitute brands of it.

The intension of the producer who advertises for his brand of the product is to differentiate his brand more from the viewpoint of the consumers and try to prove his brand to be superior to others. Thus consider a particular brand of the product much superior to others. That is, they will now regard the other competitive brand as less closely substitutes than they were thinking before. This greater degree of differentiation and consequently fall in the elasticity of substitution will cause a decline in the price elasticity of demand for the product at each price as the demand curve shifts to the right under the influence of the advertisement. It is, therefore likely that the price elasticity of demand should decline under the influence of advertising or other forms of selling costs.

The effect of advertising and other forms of selling costs on price and output are quite uncertain. This effect depends, on the other hand, the change in price elasticity of demand as a result of advertising expenditure and, upon the behavior of average cost of production. If when the demand curve shifts to the right under the influence of advertising, price elasticity of demand at the current price remains the same price and average cost of production is falling sharply with the expansion in output, then it may be profitable for the firm to set a lower price after advertisement. On the case profit maximizing price will be lower and output larger than those before advertisement. On the other hand, if price elasticity of demand declines very much as demand curve shifts to the right as a result of advertisement, and the average cost of production is raising sharply with the increase in production then in order to maximizing profits in the new situation after advertisement, the firm may raise the price and reduce its level of output.

In this case, the advantage of the increase in demand due to advertisement expenditure will be enjoyed in the form of higher price of the product rather than of increase sales of the product. But the most likely case to occur is that the price elasticity of demand declines after the advertisement is undertaken. Thus, according to somewhat at each price, that the volume of demand will increase at each price and that price and which we have considered in our analysis of advertising expenditure outlay. The intension of the producer who advertises for his brand of the product is to differentiate his brand more from the viewpoint of the consumers and try to prove his brand to be superior to others. Thus consider a particular brand of the product much superior to others. That is, they will now regard the other competitive brand as less closely substitutes than they were thinking before.

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