Chapter 8.docx-Managing in Markets We wi...
Chapter_8.docx-Managing in Markets We will analyze
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Chapter 8.docx-Managing in Markets We will analyze
Chapter_8.docx-Managing in Markets We will analyze
Chapter 8.docx-Managing in Markets ...
Chapter_8.docx-Managing in Markets We will analyze
Page 12
Sasfied with an exisng brand, slow to launch new products, and is not aware of emerging
industry trends or changes in consumer preferences where they miss opportunies to enhance
and protect its brand
As a manger of a firm in a monopoliscally compeve industry, it is important for you to remember
that, in the long run, addional firms will enter the market if your firm earns short run profits
with its product
Thus, while you make short run profits by introducing a new product line, in the long run other
firms will mimic your product and/or introduce new product lines, and your economic profits
will decrease to zero
Firms that operate in perfectly compeve markets generally do not find it profitable to adverse
because consumers already have perfect informaon about the large number of substutes that
exist for any given firms product
Firms that have market power, such as monopolists and monopoliscally compeve firms, will
generally find it profitable to spend a fracon of their revenues on adversing
To maximize these profits, managers should adverse up to the point where incremental revenue from
adversing equals the incremental cost
Incremental cost of adversing is simply the dollar cost of the resources needed to increase the
level of adversing; feed paid for addional adversing space and the opportunity cost of the
human resources needed to put together the adversing campaign
Incremental revenue is the extra revenue the firm gets as a result of the adversing campaign;
revenues depend on the number of addional units that will be sold as a result of adversing
campaign and how much is earned on each of these unis
Profit Maximizing Adversing-to-Sales Rao
Where E
represents the own-price elascity of demand for the firms products and E
represents the firms expenditures on adverng and R = P*Q denotes the dollar value of the
firms revenues
The more elasc the demand for a firms product, the lower the opmal adversing-to-sales rao
The greater the adversing elascity, the greater the opmal adversing-to-sales rao
Firms that have market power face a demand that is not perfectly elasc; these firms will generally find
it opmal to engage in some degree of adversing
The more sensive demand is to adversing, the greater the adversing elascity, the greater the
number of addional units sold because of a given increase in adversing expenditures, and
thus the greater the opmal adversing-to-sales rao

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