Scot Wick Blog

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 5 Firm Behavior and the Organization of Industry Chapter 16 of 36 - Monopolistic Competition Section 11 of 13 … How does advertising affect the price of a good? One view is advertising makes consumers view products as being more different than they would view them without advertising. Markets become less competitive, firms' demand curves become less elastic, more vertical. By creating a less elastic demand curve (less sensitivity to price) firms can charge a higher price. Another view is advertising makes it easier for consumers to find the firms offering the best prices and markets become more competitive. Firms' demand curves are made more elastic and firms charge lower prices. … Economist Lee Benham tested these two views of advertising in 1972. In the United States during the 1960s the various states had different laws about advertising by optometrists. Some states allowed advertising for eyegla...