Discuss the role of advertising and the desired impact on the firm’s demand curv

Question

Discuss the role of advertising and the desired impact on the firm’s demand curve. Contrast this to advertising at the industry level (think “Got Milk”).


It was assumed that a monopoly would produce at a level that maximizes profits. Can you think of reasons why a monopoly might decide on their own to increase production and lower prices to earn an acceptable profit rather than maximize profits?


Contrast the market demand/supply curves and the individual firm’s labor supply/demand curve in a perfectly competitive labor market. How does the law of diminishing marginal returns affect a firm’s demand for labor?

Explanation / Answer

The purpose of advertising is either to shift the firm's demand curve to the right or to make the firm's demand curve more price inelastic. An advertisement focused on shifting the demand curve to the right will talk about how good the product is in general. Industry advertisements do this. "Got Milk" is a good example. An advertisement focuses on making a firm's demand more price inelastic will talk about how different and superior the firm's product is to competing firms. The firm may fear regulation. If the firm becomes regulated, it may begin to earn a zero profit. So, in order to avoid regulation the firm may "behave" by lowering price and raising quantity because the long-term benefit of remaining unregulated outweighs the short term benefit of profit maximizing in the current period. At the individual level, the firm's demand is flat and the firm's supply curve is backward bending so that the individual will never work more than a particular amount of hours and will, at some point, begin to work less the more he or she is paid. At the aggregate level, the demand curve is downward sloping and the supply curve is upward sloping or flat (flat implies all firms have a constant marginal cost). The firm's demand for labor may be downward sloping if there are diminishing marginal returns to labor. That is, the firm is willing to pay more for the first few workers because they are more valuable than later workers.

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