Question

Advertising impact monopolistic competition. Why? Please explain it.

Answer 1

Monopolistic competition in the market type in which-

there are large number of buyers and sellers in the market

there are few barriers to entry and exit in the market

long-term economic profit is zero

products are slightly differentiated in terms of shape ,size ,colour etc

so in this market advertising plays a bigger role among different firms of the market

advertising in simple meaning is a technique used by different firms to create product differentiation and create competitive edge over their competitors

it actually causes increase in the demand and reduce the demand elasticity

it means the demand becomes more inelastic in elastic

in inelastic demand even with a very high change in the price can causes very low change in the quantity demanded

in the short run advertising maybe expensive but in the long run it will create more revenue than the cost of advertising and decreases the average cost as well