What Role Does Advertising Play In Microeconomics



Advertising plays a major role in the economy. It provides useful information to consumers about product and service choices, as well as comparing features, benefits, and prices. With complete information, consumers and businesses often choose to purchase additional products and services.

It causes an economic chain-reaction that (a) generates a net gain in direct sales and jobs owing to the promotion of the industries’ products and services, (b) generates indirect sales and jobs among the suppliers to the industries that incur the advertising expenditures, and (c) generates indirect sales and jobs among all other levels of economic activities as the sales flow throughout the economy.

Advertising also plays a significant role in the business cycle. One is just to attract interest in a particular product, which shifts the demand curve to the right. The other is to make the product look unique i.e. different from other similar competitors. This has the effect of giving the firm a small amount of monopoly power, which allows for a price increase over average costs. As the broader economy shifts between periods of growth and recession, advertising shifts its focus. During recession, advertising focuses on the price of a product or service. If one company restricts advertising in order to cut costs during a downturn, another company might boost advertising spending to grab customers and grow its market share. Advertising helps stimulate economic growth. In a country in which consumer spending determines the future of the economy, advertising motivates people to spend more. By encouraging more buying, advertising promotes both job growth and productivity growth both to help meet increased demand and to enable each consumer to have more to spend.

Role of advertising in the microeconomics offers the following benefits:
1.Advertising is a guide to prospective buyers. It provides information utility about products, their specifications, features, functions and prices to potential buyers.

2.Advertising influences primary and secondary demand for a product. It may shift the demand for a class of products when the demand for that product is expansible, i.e., subject to increase through appeals to consumers’ buying reasons.

3.Advertising inspires product differentiation. In product differentiation lays the prospect to influence consumers to develop brand preferences. Expanding the range of merchandise through the stimulation of product utility among brands has been much more direct than their influence in widening the range through new inventions of significant nature.

4.Advertising stimulates introduction of new products at a regular interval. Encouraging innovation new product introductions require extensive research, development expenditure and substantial investment in production facilities. Advertising can help in recovering such expenses.

5.Advertising provides financial support to media. Selling of space or time by the media to advertisers is essential for the financial feasibility of the media. Abundance of advertising revenue is a per-requisite for the development of media through introduction of new media vehicles and for continuation of existing ones.

6.Advertising affects the long-run propensity to consume by influencing tests, though it is highly doubtful that the effect could happen so quickly as to affect spending over a business cycle. However, advertising might affect the short-run propensity to consume by informing consumers of bargains.