Question

True or false?

Product differentiation is important, but other means, like advertising, are important too. If advertising can get more customers to choose a firm's product, its demand curve will become more inelastic (steeper) and cause demand for the firm's product to increase (rightward shift).

Answer 1

If product differentiation is high, a firm faces an inelastic demand. More is the product differentiation less will be the elasticity of demand. In monopolistic competitive market, the sellers get monopoly over their product due to the product differentiation. This enables the sellers to fix a high price as the demand is less elastic due to the product differentiation. The advertisement can also affect the price elasticity of demand and makes the demand for a product less elastic. In a monopolistic competitive market the advertisement cost is a special feature. The sellers incur advertisement cost in order to influence the buying behavior of consumers. The advertisement attract the consumer’s attention, arouse their interest for a particular commodity, create desire to purchase a product and reveals how far a firms product is differentiated from other firms. Thus the demand curve become steeper and the producers can fix a higher price without losing its customers.

Similarly the taste and preference of the consumers is largely influenced by the advertisement. Advertisement influences consumer’s taste and preferences by providing information about the benefit of the product, its price, quality, ingredients, product quantity, product testimonial, product packaging, product name and colour, and its durability. This moves in consumers taste and preference positively and shifts the demand curve of a firm rightward.

Answer: True