BOX 2.4 ADVERTISING AND ITS EFFECT ON DEMAND CURVES CASE STUDIES AND APPLICATIONS How to increase sales and price When we are told that a product will make us more attractive, price can be raised to P2 and sales will be Q3 - still enrich our lives, make our clothes smell great or allow us to substantially above Q1. The total gain in revenue is shown by save the planet, just what are the advertisers up to? 'Trying to the shaded area. sell the product', you may reply. How can advertising bring about this new demand curve? In fact there is a bit more to it than this. Advertisers are trying to do two things: Shifting the demand curve to the right Shift the product's demand curve to the right. This can occur in two ways. First, if advertising brings the Make it less price elastic. product to more people's attention, then the market for the good grows and the demand curve shifts to the right. Second, This is illustrated in the diagram. if the advertising increases people's desire for the product, they will be prepared to pay a higher price for each unit Effect of advertising on the demand curve purchased. P Making the demand curve less elastic Demand shifts to the right and becomes less elastic This will occur if the advertising creates greater brand loyalty. People must be led to believe (rightly or wrongly) that If price is raised competitors' brands are inferior. This can be done directly by to P2, revenue comparing the brand being advertised with a competitor's increases by product. Alternatively, the adverts may concentrate on C the shaded area making the product seem so special that it implies that no P2 other product can compete. These approaches will allow the b P. firm to raise its price above that of its rivals with no significant fall in sales. The substitution effect will have been lessened because consumers have been led to believe that D2 there are no close substitutes. D1 ? 1. Think of some advertisements which deliberately seek to make demand less elastic. 2. Imagine that 'Sunshine' sunflower spread, a well- O Q3 Q2 Q known brand, is advertised with the slogan 'It helps you live longer'. What do you think would happen to the demand curve for a supermarket's own brand of D1 shows the original demand curve with price at P, and sunflower spread? Consider both the direction of shift sales at Q1. D2 shows the curve after an advertising and the effect on elasticity. Will the elasticity differ campaign. The rightward shift allows an increased quantity markedly at different prices? How will this affect the (Q2) to be sold at the original price. If the demand is also pricing policy and sales of the supermarket's own made highly inelastic, the firm can raise its price and still brand? What do you think might be the response of have a substantial increase in sales. Thus, in the diagram, government to the slogan