Page 191 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes
Figure 12.4: Demand Curve Facing Everest Masala for its Spice Powders

Advertising seeks to increase demand and to reduce demand elasticity.

1. To Increase Demand: The first objective of advertising is to simply increase the demand.
This can be illustrated using the demand curve for Everest Masala presented in this
diagram.

Everest’s current profi t-maximising production is 6 types of spice powders packets, each
of which is sold for a price of ` 4.95. Everest’s advertising goal is to increase the number of
buyers, who are willing and able to buy at each price, that is to shift the demand curve.

Figure 12.5: Increase in Demand due to Advertising

Everest hopes that demand will increase with advertising (shown in figure 12.5). The

demand curve shifts upwards. With this new demand curve, higher prices correspond
to each quantity. Everest’s new profit maximising production level is 6.7 packets, each of

which is sold for a price of ` 6.85.
2. To Reduce Demand Elasticity: The second objective of advertising is to reduce the price

elasticity of demand. As a monopolistically competitive firm, Everest faces a relatively
elastic demand and therefore there is a limit as regards the pricing.

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