Economics for Management

Chapter 3

Question 2

Advertising can inform buyers, but sellers must incur costs to advertise. If so, advertising can result in higher prices to consumers. Does this mean advertising is economically inefficient? If not, explain how it can simultaneously create value and increase market prices.

A straight forward transaction, where there are no transaction costs does not occur in the real world. As part of the transaction costs, the sellers have to spend on advertising. This is needed to make the consumers aware of their products. By reaching a wide range of consumers, and thus increasing sales of the products, the sellers can afford to sell the product at a lower price than they would have to if they did not advertise. As we have read in chapter 2, sears by broadcast advertising have a lower transaction cost which in turn lowers the selling price. Also some consumers value their time highly enough to not spend it on going from store to store and comparing prices. By seeing the advertisements in TV, newspaper, online etc, the consumers can make decisions in a short period of time. Even if the seller has a lower price and does not advertise it, he may not attract as many customers as the seller who has advertised.

Question 16

Following are observations on the market price and the quantity of good X produced and consumed in three different years: $10 and 100 units, $4 and 57 units, and $8 and 88 units. Can we conclude that the market demand for X slopes upward?

Concluding that the market demand for X slopes upward is not correct. In the graphs below, on the X axis is the price and on the Y axis is the number of units produced and consumed. If the data given is taken to be three consecutive years, then the slope of market demand raises and falls along with the price as sown in the first graph. If the data given is taken to be in increasing or decreasing order of price, the slope is upwards.

In the order data is given.

Prices in increasing/decreasing...