Activity 2(k)

Activity 2k: Advertising to boost demand and reduce PED

  1. A successful advertising campaign is designed to positively affect consumers’ tastes and preferences such that a greater quantity will be demanded at each given price. This shifts the demand curve to the right. The demand curve might pivot (it gets a little steeper as the advertising might result in a lower PED).
  2. Advertising represents a cost of production for the firms. This decreases their willingness and ability to supply at each price point, resulting in a shift of the supply curve to the left.
  3. PED measures the responsiveness of demand to changes in prices, expressed in percentage changes.
  4. Brand loyalty is designed to effectively reduce the PED associated with a brand/product. It leads to consumers seeking out previous purchased brands when a new product is needed and paying less attention to alternative brands and their associated prices.
  5. Brand loyalty is prevalent in a wide range of markets. People may shop at the same supermarket each week because they have a loyalty scheme (such as FlyBuys at Coles). They may purchase the same brand of car in the future if they have had no significant issues with their previous purchase. People also tend to be loyal to a wide range of household products such as toothpaste, washing detergent and cat food.
  6. Advertising, if successful should help to develop brand loyalty. People may want to be associated with a certain brand if they feel that it will enhance their status or the quality of their life. Once brand loyalty is established, consumers may become less responsive to price changes. The PED therefore decreases and increases the ability of firms to raise prices and extract greater revenue from the consumer. This is one of the key strategies used by Apple, who tend to charge a much higher price for their phones than their competitors.
  7. If the PED is low, a percentage increase in price will be associated with a proportionately lower percentage decrease in the quantity demanded. In this scenario total revenue (P times Q) rises.
  8. The PED of iPhones is likely to be low. The brand loyalty for the product is high. This means that many consumers, when looking to purchase a new phone, will not even consider an alternative brand (the substitutes are not seen as viable) even if the price is lower. The PED may also be lower as most consumers tend to pay off their phone over a 24 month period (via a contract). The percentage of the income paid for the phone each month is relatively low compared to average incomes so many consumers may be relatively unresponsive to any price increase (because the monthly price increase is relatively small).