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Business Economics · Impact of advertising on sales and demand

Advertising and the Demand Curve Explained

Updated 11 October 2026 · Fact-checked

Advertising aims to shift a firm's demand curve to the right, so more is sold at every price. It can also make demand less price elastic by building brand loyalty. To answer exam questions, name the type of advertising, show the shift, and state the effect on price, quantity and revenue.

Understand Advertising and the Demand Curve

A demand curve shows the quantity buyers will purchase at each price, holding other factors fixed. Those other factors include income, tastes, prices of related goods and expectations. Advertising works on tastes and information. So it is a non-price factor, and it moves the whole curve rather than moving along it.

Persuasive advertising tries to raise how much buyers like the product. It shifts demand to the right. At the same price, quantity demanded rises. Informative advertising tells buyers that the product exists, what it costs and what it does. It can also shift demand to the right because more people now know about it.

Advertising can also change price elasticity of demand. If it builds brand loyalty and makes the product seem to have few close substitutes, buyers become less sensitive to price. The demand curve becomes steeper around the current price. This gives the firm room to raise price without losing many sales. Comparative advertising that stresses a rival's higher price can have the opposite effect and make demand more elastic.

Keep two ideas apart. A change in price causes a movement along the curve. A change in advertising causes a shift of the curve. Advertising also costs money. So the firm only gains if the extra revenue from the shift is greater than the extra cost, including the advertising spend.

In a diagram, draw the original curve D1 and a new curve D2 to its right. At price P, quantity rises from Q1 to Q2. If the firm then raises price, it moves up along D2 to a higher price and a quantity that may still exceed Q1.

Key rules to remember

Price elasticity of demand
PED = (% change in quantity demanded) ÷ (% change in price)
Usually negative; many texts quote the absolute value. Demand is elastic if |PED| > 1 and inelastic if |PED| < 1.
Advertising elasticity of demand
AED = (% change in quantity demanded) ÷ (% change in advertising expenditure)
Positive for a good whose sales rise with advertising. A larger value means sales respond more strongly.
Total revenue
TR = P × Q
Use it to test whether a price rise after advertising still increases revenue.
Net gain from advertising
Net gain = change in profit before advertising cost − advertising cost
Advertising is worthwhile only if this is positive.
Shift versus movement
Advertising → shift of the curve; own price → movement along the curve
State this clearly in written answers.

How to solve Advertising and the Demand Curve questions

Use this order for any question on advertising and demand, whether it is a multiple-choice question, a diagram question or a calculation.

  1. 1Identify the goal of the advertising: inform, persuade, or compare with rivals.
  2. 2Decide the effect on demand: a rightward shift for most successful campaigns, and say whether it changes the elasticity.
  3. 3Draw or describe the diagram: label the axes, D1, D2, price P, and quantities Q1 and Q2.
  4. 4If numbers are given, compute the percentage changes using the data supplied and then the elasticity or revenue.
  5. 5Check for any price change: separate the shift caused by advertising from the movement along the curve caused by the price change.
  6. 6Compare the extra revenue or profit with the advertising cost.
  7. 7State the conclusion in one sentence, and mention a limit such as rivals responding or advertising having diminishing returns.

Quickest way: Shift, slope, then cost

When to use it: Use this for multiple-choice questions and short written parts when time is tight.

  1. Ask: is the cause advertising or price? Advertising means shift; price means movement.
  2. Decide the direction: successful advertising means shift right.
  3. Ask whether loyalty is built: if yes, demand becomes less elastic.
  4. For a number question, compute TR = P × Q before and after.
  5. Subtract the advertising cost before saying it was worthwhile.

Common mistakes in Advertising and the Demand Curve

  • Showing advertising as a movement along the demand curve.

    Students link any rise in quantity with a fall in price.

    Fix: Advertising is not the price. Draw a new curve to the right and label it D2.

  • Saying advertising always makes demand inelastic.

    The brand-loyalty argument is memorised as a rule.

    Fix: Say it can make demand less elastic if it differentiates the product. Comparative price advertising can make demand more elastic.

  • Ignoring the cost of advertising when judging success.

    The focus stays on higher sales.

    Fix: Always compare the gain in revenue or profit with the spend.

  • Forgetting to label the axes or the two curves.

    Diagrams are drawn in a hurry.

    Fix: Label price on the vertical axis, quantity on the horizontal axis, and D1, D2, P, Q1 and Q2.

  • Treating a rise in revenue as a rise in profit.

    Revenue is easy to compute, costs are overlooked.

    Fix: Subtract all extra costs, including advertising, before concluding anything about profit.

Worked examples

Example 1

A firm sells 2,000 units a month at ₹50. After an advertising campaign costing ₹20,000, it sells 2,600 units a month at the same price. The cost of producing each unit is ₹30. Is the campaign worthwhile in that month?

Show the solution
  1. The price is unchanged, so this is a shift of the demand curve to the right, not a movement along it.
  2. Extra units sold = 2,600 − 2,000 = 600.
  3. Extra revenue = 600 × ₹50 = ₹30,000.
  4. Extra production cost = 600 × ₹30 = ₹18,000.
  5. Extra profit before advertising cost = ₹30,000 − ₹18,000 = ₹12,000.
  6. Net gain = ₹12,000 − ₹20,000 = −₹8,000.

Answer: The campaign loses ₹8,000 in that month, so it is not worthwhile on one month's figures alone. It could still pay off if the effect lasts over several months.

Example 2

Before advertising, a firm sells 1,000 units at ₹100, and a 10% price rise would cut sales by 20%. After advertising, demand is less elastic, and the same 10% price rise cuts sales by only 5%. Assuming the post-advertising quantity at ₹100 is 1,000 units, compare total revenue after the price rise in both cases.

Show the solution
  1. Before advertising: new price = ₹110 and new quantity = 1,000 × 0.80 = 800.
  2. Revenue = 110 × 800 = ₹88,000, compared with ₹1,00,000 at the start.
  3. PED before = −20% ÷ 10% = −2, so demand is elastic.
  4. After advertising: new price = ₹110 and new quantity = 1,000 × 0.95 = 950.
  5. Revenue = 110 × 950 = ₹1,04,500, compared with ₹1,00,000 at the start.
  6. PED after = −5% ÷ 10% = −0.5, so demand is inelastic.

Answer: Before advertising, the price rise cuts revenue to ₹88,000. After advertising, it raises revenue to ₹1,04,500. Advertising made demand less elastic, so a price rise became profitable for revenue.

Exam tips

  • Always draw the diagram, even when the question does not insist on one. Label D1, D2, P, Q1 and Q2.
  • Use the words shift and movement precisely. Examiners look for them.
  • When numbers are given, include the advertising cost before judging whether it was worthwhile.
  • Discuss both informative and persuasive effects when the question says evaluate or discuss.
  • Mention limits: rivals may respond with their own advertising, and extra spending may bring diminishing returns.

Practice questions from Impact of advertising on sales and demand

Advertising and the Demand Curve in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Advertising and the Demand Curve: frequently asked questions

Does advertising always shift the demand curve to the right?

Not always. A successful campaign normally does. A poor or misleading campaign, or one that causes a backlash, may have little effect or even reduce demand.

How does advertising change price elasticity of demand?

If it builds brand loyalty and makes the product seem different from substitutes, demand becomes less elastic. Buyers then react less to a price change. Advertising that stresses low prices can make demand more elastic.

Is advertising a movement along or a shift of the demand curve?

It is a shift. Advertising is a non-price factor, so it changes demand at every price. Only a change in the product's own price moves you along the curve.

How is advertising elasticity different from price elasticity?

Price elasticity measures how quantity responds to a change in price. Advertising elasticity measures how quantity responds to a change in advertising spending. Both use percentage changes.