Advertising and Its Effect on the Demand Curve

2038 Words Apr 10th, 2013 9 Pages
THE UNIVERSITY OF QUEENSLAND
ECON7002
Markets in Action
Advertising and its effect on the demand curve

Markets in Action
Advertising and its effect on the demand curve

Advertisement has always been an important market strategy for firms to accomplish their goals. From cereal companies to airline companies, it is inevitable to go through the process of advertising. However, what purpose does advertising serve for consumers and suppliers in the market? In this report, it is to examine the relationship between advertising and the market demand curve. Moreover, the impact that advertising brings toward the consumers and the company supplying the product or service.

It is no doubt that peoples’ income is always limited relatively
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For example, salt and pepper. The third factor is whether the product/service is a luxury or a necessity. Products/services which are necessary goods tend to be more inelastic as they are used to fulfill the basic needs of a consumer even if the prices go up. Whereas luxury goods are more elastic as purchases can be postponed to the future. For example, laundry detergent is a necessity and Tiffany & Co jewelry is a luxury. The forth factor is whether or not the product/service is addictive. Products/services that are habit forming tend to be inelastic as they are required to satisfy the habit of the consumer. For example, cigarettes and alcohol beverages are addictive goods. The last but not the least factor is the amount of time consumers have to respond to a change in the price. With a longer time period, the elasticity of demand is more elastic as consumers have more time to adjust their purchasing habit (Welker 2010).

In a competitive industry such as electronic products and clothing, the demand curves are most likely elastic. Advertising attempts to make the demand curve of the product/service more inelastic by utilizing the first and third factor in the previous paragraph. Creating more product differentiation to their substitutes and making their products as a necessity. A

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