Oct 04 2010

The role of advertising in determining price elasticity of demand

Published by at 9:00 pm under Elasticity

How can a commercial like the one below decrease the price elasticity of demand for a product like Molson Canadian beer? After this extremely successful commercial was released in Canada, Molson’s share of the beer market increased by 3%, while that of Labatt’s its largest competitor, shrunk by 3%.

[youtube Du-3DZILy2M nolink]

The factors that affect the price elasticity of demand for a particular good are:
S –the number of  substitutes the good has.
P – The proportion of income the good is of the consumer’s income.
L – Whether the good is a luxury or a necessity
A – Whether the good is addictive
T – The amount of time consumers have to respond to a change in the price

Discussion Questions:

  1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?
  2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

91 responses so far

91 Responses to “The role of advertising in determining price elasticity of demand”

  1. Gunjan Vengon 20 Oct 2010 at 11:30 am

    1. A successful ad campaign reduces a consumers' responsiveness in price change because now the consumers feel like they have to be "loyal" to Molson beer. By having a good ad campaign, by being patriotic, they are encouraging more Canadians to buy Molson beer. Canadians think that Molson is a better company because they are patriotic and even if the price rises, they will still continue to buy Molson beer because it is a better company in their eyes.

    2. Molson's should decrease the price elasticity because the crowd now doesn't react as much to price changes as it did before. Before, it was easy to just switch to a substitute, Labbat. But now, after the ad campaign, since Labbot is "bad", there is no real substitute. Thus, the customers will still be asking for the same amount of beer even if it is at a higher price and Molson's can make a larger profit, selling the same amount of beer.

  2. Se Uk Shinon 20 Oct 2010 at 11:30 am

    How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    By raising canadian's attention, canadian will tend to buy Molson beer but not Labatt beer. This successful advertising campaign uses patriotism to raise canadian's attention which leads the Molson beer to sell more beer.

    Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    When the price elasticity of demand decreases, this can come out with many results. First of all, company can gain more revenue when they increase their price. It is because when the price elasticity of demand decreases, the change in QD is not proportional to the change in Price. So there will be no customers loosing when the price goes up

  3. Yu Shengon 20 Oct 2010 at 11:31 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    This successful advertising campaign didn't aim to compete with Labatt, it's advertising campaign promoted Canada. This therefore made Labatt a very irrelevant substitute as Molson promoted Canada but Labatt didn't. So when there is no relevant substitute to Molson beer, the changes in the price of Molson beer wouldn't reduce the consumers' responsiveness.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    A firm like Molson would like to decrease the price elasticity of demand because Molson does he does not want the consumers' responsiveness to change if the price of the good had changed. Therefore, Molson tried to eliminate its substitute.

  4. Yuto Takaokaon 20 Oct 2010 at 11:32 am

    1) How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    Molson beer successfully uses the advertisement to speak to the customer that we are the only beer company that Canada can be proud of. As the Canadians begin to drink this product, as the beer is addictive, one of the determinants of price elasticity, the customer's responsiveness to changes in price reduces as they are now addicted to the product, although it is not a necessity.

    2) Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    Beer is a really competitive market where companies from all around the world competes for the customer. Therefore, once you increase the price of your beer, the consumers have all other cheaper substitutes to choose from. By reducing the consumer's responsiveness to change in price, Molson can increase the price of their product within the competitive market without losing majority of it's consumers to other substitutes.

  5. Ashrafon 20 Oct 2010 at 11:32 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    Due to having a successful advertising campaign, even though price might increase for the product, consumers' responsiveness may be reduced because of the way the advertisement makes people view the product. The advertisement convinces people to believing that Molson beer is the best quality beer out there. This contents of the advertisement, for example patriotism in this commercial, helps the the beer sell by exaggerating the product and making it seem like a superior product to other substitutes.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    The firm may want to decrease the price elasticity of demand for its product to be able to increase the price without having to lose some of its customers. Usually, if the price of a product, for example Molson beer, increases, then consumers will try to buy a cheaper substitute, so, the firm is trying to avoid this situation by advertising.

  6. Anthonyon 20 Oct 2010 at 11:33 am

    How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    A successful advertising campaign can reduce consumers responsiveness to a change in price as the advertising campaign may cause the consumer to change their view of the product – therefore if the price of the product increased the demand may not fall as much due to a successful advertising campaign.

    Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    It is an interest for the firm as they do not want to loose the demand for their product. For example if the price elasticity increased – this may cause the demand for the product to fall so it is a interest of the firm to decrease the price elasticity for their products.

  7. Miho Ohashion 20 Oct 2010 at 11:34 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    All the canadians will tend to buy Molson beer because of the advertising which represent the country. Since the advertising campaign of the beer is successful, reducing the number of substitutes such as Labbat. Molson beer could be more price inelastic, thus they can move the prices.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    so that the Molson beer may be able to increase the price of their products and selling at different a prices without loosing customers. They can increase the total revenue as well.

  8. Aleksion 20 Oct 2010 at 11:36 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    because if the advertising is good, people get a good image for the product and they don't think about the price that much anymore. For example this video showed the advertising of canadian beer and it is very clever because it connects the beer to the things canadians and all the people around the world wants most, for example freedom.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    a firm like Molson is good to create a successful advertising program because the advertising affects to the price elasticity of demand if the product gets a good image. Obviously, then Molson can increase the price of the product and make make profit and at the same time it doesn't lose customers.

  9. Chouvaliton 20 Oct 2010 at 11:37 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    By using patriotism and some humor, the Molson beer advertisement became a success. a successful advertising campaign can convince the people to buy the good at higher price than a moderate advertising campaign. when the customers are willing to buy at a higher price, the product will most likely become inelastic.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    By making a product inelastic, a firm can raise the selling price of the product sold without affecting much of the quantity demand by consumers of the product it self. if the product becomes inelastic, the firm can raise the price to increase the revenue.

  10. Kevin Jungon 20 Oct 2010 at 11:39 am

    1. Beer is one of the product that is known as an "addicted" product, which does not really shows the responsiveness of change in price. And Molson beer moreover had great succeed as in promoting themselves with patriotism that instantly attract consumers, which consumers will consume despite the price of a good increases just for the short run. Plus, as there is fewer substitute goods that competes with Molson beer, consumers will rather prefer Molson beer.

    2. As commercial advertisement leaded to success in market, people will tend to buy more products of Molson. People has been attracted with Molson with the reasons above, and as they have relatively better preferences, despite the price changes, consumers will still consume the Molson beer

  11. Dong Hwion 20 Oct 2010 at 11:39 am

    How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    The key factor which led to decrease in the responsiveness of the Molson beer is the number of substitutes. Molson beer's substitute was Labatt’s but after the advertisement, the Labatt’s beer can no longer substitue the Molson's beer. Consumers respond to the advertisement that there is no beer like the Molson's beer which represent canada and might think that Molson beer is the beer or canada. Therefore consumers responsiveness will decrease leading to a inelastic demand where price changes but not much of QD changes.

    Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    If the elasticity of a product is decreased the firm will be more stable and will not have huge decrease in their revenue because of decrease in demand if other substitutes arise. The demand for their product will not decrease much when the price is changed. the consumers are unresponsive.

  12. Wenyion 20 Oct 2010 at 11:40 am

    The strongest impact that the commercial has done to achieve the purpose of reduce the elasticity of demand on their beer is to let people realized that the M's beer is also representing their country. It brings up people's interesting unless the person who drinks the beer doesn't like Canada.

  13. Konstantin Bon 20 Oct 2010 at 11:40 am

    A successful advertising campaign can reduce the price elasticity of a good because it supports and increases brand loyalty and therefore reduces the amount of substitutes without actually changing the product. In the example of Molson beer the advertising campaign made consumers associate Molson beer with fun, their country Canada and patriotism whereas Labatt is still the same beer as in the beginning. Hence consumers will be much more encouraged to choose Molson over Labatt and they are not perfect substitutes for each other anymore. As the number and closeness of substitutes is a factor influencing the responsiveness consumers have in their purchasing to changes in price, a successful advertising campaign can decrease the price elasticity of demand for a good.

    It is in the interest of firms like Molson to decrease the price elasticity of demand because this means there will be more revenue if consumers reduce their buying of the product after little price changes. Before the advertising campaign the demand for Molson beer was relatively more price elastic than after so now if there is an increase in price less consumers will switch to other beer brands and Molson will make more revenue.

  14. Renee Ron 20 Oct 2010 at 11:42 am

    How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    A successful advertising campaign can reduce consumers' responsiveness to price changes because it makes the consumers question the substitutes a there product. As beer is not a necessity and in most cases people will usually go with the taste and price that they prefer when choosing which beer they drink. And so, when the price changes of that type of beer, in most cases the person would switch to something more affordable. This add makes consumers rethink this natural "instinct" and choose to stay with their original beer, in the case of this ad, Molson. This add campaign uses the Canadian peoples' patriotism and pride for their country to persuade them to overlook the costs and go with the brand that has been labeled in a sense, the "Canadian beer".

    Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    When the demand for a product is very elastic, it means that when the slightest price change is introduced that there is a major response in the market, this can either go both ways, good or bad. They would want to be able to change the prices of their good (increase prices) and without losing any of their consumers, this is why they introduced the ad campaign to do so and in turn they can make more revenue from their product sales.

  15. yurion 20 Oct 2010 at 11:42 am

    1.How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    By this successful advertisement canadian consumers will remember this ad and buy this product when they go to the store. It also makes canadian feel proud of themselves just by buying Molson because drinking this product makes you more canadian. Therefore Canadian will buy this product even if the price of the product goes up.

    Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    The advertisement has successfully attracted the consumers by the reason above. So even the price of the product increases consumers will still buy it which will lead to increase in revenue.

  16. junfengon 20 Oct 2010 at 11:43 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    Obviously, the advertising are encouraging people to buy more of the Molson Canadian beer by somehow. And the way here he does was actually show off that Molson Canadian beer is better than Labatt'.

    2.Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    It is interest of a firm like Molson to decrease the price elasticity of demand because that means the price of the beer is actually increase, and which will lead to a increase of the total revenue. And by the way, because of the advertising, people are trend to be more reference to the Canadian beer, so it has no substitutes, and the benefit seems obviously.

  17. Erick Chanon 20 Oct 2010 at 11:45 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    A successful advertisement like Molson beer makes the customers more interested in this product. They are more willing to buy Molson beer than other beer brands, which makes the power of its substitutes weaker. The attraction and the meaning of the advertisement makes the customers consider less on the price. In other words, it makes the price more inelastic.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    Because decreasing the PED make them able to increase the price while lossing a less-than-proportion amount of customers, which means their total revenue could increase.

  18. Matthew Mottersheadon 20 Oct 2010 at 11:46 am

    1) The advertisement may make the product seem better than it really is, causing people to think it is something special. This results in people becoming more willing to pay more for the product rather than their substitutes. This can also result in the customer becoming more willing to pay a higher price for the product and the price becoming less elastic. The use of a catchy commercial, which promotes Molson, gives it the edge over other beers. Resulting in the prices becoming less elastic and being able to charge a higher price.

    2) It is in the interest of the firm because if your product is inelastic, then it is less responsive to prices. This can result in the rising of prices without the loss of customers and an overall revenue rise.

  19. Dong Hun, Jangon 20 Oct 2010 at 11:48 am

    1:How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    by success advertising campaign, it can be reduce the number of competitors because the main purpose of the advertising is give a idea in to consumer's head and according to that there will be increase number of demand of produce. anyway, such as beer is one of the 'addicted product' so change of price is not really affect to demand of product.

    2:Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    the reason that firm like Molson want to decrease the price elasticity of demand because by that they can increase the demand of product without losing customer when they increase the price of the product.

  20. kenon 20 Oct 2010 at 11:58 am

    This way of advertising the product will turn it into a necessity to the consumer. There is no way for the consumer to find other substitute for such a product, which attached to national pride. Consumer will purchase the good regardless of the price change.

    In addition, a successful advertisement will shift consumer's 'taste', therefore people will tend to buy more products of Molson.

  21. Eamon Emonsta Stensoon 26 Oct 2010 at 3:44 am

    How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    A good advertisement will make the consumer remember the product, so if the price goes up a dollar it wont matter because of the memory the person had will want them to buy it

    Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    it is interested because if it can make it perfectly elastic it will mean when ever price increases so will demand which all companies want, also it can get rid of competition

  22. Alain Meyeron 01 Nov 2010 at 7:25 am

    1. They can reduce consumer responsiveness in the price by making the person's individual value for the company higher than it previously was. By creating ads like this, they can reinforce the reasons that person picks Molson for its beer, and so they would be less likely to change to another beer in the event of a price increase. In more economic terms, they would be making people less likely to think about the substitutes (meaning other brands), thereby helping to eliminate the first determinant of PED.

    2. It's in their interest to create an advertisement like this because it means that the company can acquire less elastic status, so they can raise their prices, thereby increasing their revenue and hopefully their profits.

  23. Markel Zuritaon 07 Nov 2010 at 5:26 pm

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    – A successful advertising campaign can reduce consumers' responsiveness to changes in price of a good like Molson beer because by advertising the beer, they are making it more unique and emphasizing patriotism which will therefore lead to an increase in quantity demanded by Canadians. An increase in price of Molson beer after this ad will therefore have a very small proportionate change in quantity demanded since most Canadians will want to buy the beer. By creating ads, Molson beer advertises it's beer and therefore attracts consumers and makes them less aware of the substitutes available because of the new image Molson beer has.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    – It is in the interests of a firm like Molson to decrease the price elasticity of demand for its product because by doing this, Molson can increase the price for beer which will now be more price inelastic, meaning that consumers will not be very responsive to a change in price and will continue buying the beer.

  24. Susanne Robertsonon 08 Nov 2010 at 4:35 am

    1. How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?

    In this case with Molson beer, patriotism plays a major part of this advertising campaign. The company is trying to sell the beer as patriotic and "unique" to the Canadians and therefore reducing the temptation to switching to other beer substitutes. In general, advertisements always market their product as the best there is, this appeals to the consumer as they are buying the best which ultimately reduces the responsiveness to changes in the price.

    2. Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?

    If demand for a product is inelastic, consumers will be less responsive to changes in price. As a result, firms can be flexible when changing their prices as they know the consumers for their particular product will be less responsive to changes in price and continue buying the product.

  25. Francesca Perversion 09 Nov 2010 at 3:01 am

    1.The advertising increases peoples awareness of the product and of its special qualities. This hit the hearts of the Canadians and they all decided that to be proud Canadians, they should buy the Molson beer. So Molson beer was considered better than Labatt and not a substitute anymore,and reducing the number of substitutes a product means that consumers will most likely still buy the product regardless of price.

    2. Firms like Molson want to keep the elasticity to a minimum because they don’t want many people to stop buying their product if the price increases. Molson is able to increase the price of beer and still have the same market size to consume the beer, therefore increasing profits because consumers are loyal to that brand.

  26. Lucyon 16 Nov 2010 at 11:18 am

    1. It seems crazy that this commercial could make so many people choose this variety of beer when the commercial doesn't even mention anything about the quality of the beer itself. By simply appealing to Canadians' sense of patriotism that many people changed which beer they bought? Perhaps it's entirely a matter of name recognition. Even if the price rises, people have some inkling that this beer is somehow 'better,' though perhaps they don't even remember why, and the inkling is enough that they are willing to pay for it. It would be interesting to see how far Molson could raise the price before people would ignore the preference created buy the commercial. I guess that would be the measure of the elasticity for the beer?

    2.It is in the interest of a firm to create price elasticity for their product because it allows them to raise the price without losing customers, thus maximizing profits.

  27. Katrinaon 07 Dec 2010 at 8:47 am

    1. A successful ad campaign can reduce a consumer's responsiveness to prices in several ways. In this case, with Molson beer, the good has many subsitutes, it is a luxury, and has the potential to be addictive. However, the advertisers took into account sentiments of the public, unrelated to beer, and made it seem like those feelings were because of, or supported by the beer itself. This ad tapped into national pride, making Canadians want to support their country by purchasing patriotic beer.

    2. The more inelastic a good is, the more a company can charge for it. Therefore, the goal of the Molson beer company is to make its good so precious and valued to the public that they feel the need to buy it at any price.

  28. Aly W.on 07 Dec 2010 at 10:32 am

    1. Molson beer has many substitutes, it is also a luxury, and can be addictive. But the advertisement played off of peoples patriotism, making them feel like this beer was better because it supported Canada. This made the people more likely to buy this beer no matter the price.

    2. If Molson makes their product less elastic, then they can charge more for it and people will still buy it. This will allow Molson to make more money off of the beer.

  29. Matt Riceon 07 Dec 2010 at 11:25 am

    1) Well first of all, i'm sure glad that i can honestly claim NOT to be a schmuck like all those who fell for this ad campaign. Launching a campaign such as this one taps into both ethos and pathos, as the man in the commercial gains the respect of his audience by making patriotic statements that he knows they will just eat up. Doing this makes the audience absolutely fall in love with this particular spokesman. As a result of him being associated with Molson Beer, it makes them love it as well. Furthermore, making such patriotic statements creates a feeling that "if i buy this beer, i'm supporting my country as well," therefore, prompting people to buy more of it. The purpose however, of doing all this is to create an idea of "need" for a certain product. Once people become dependent on a certain product, they will continually purchase it in spite of an increase in price – even if the item is a luxury and/or has many substitutes.

    2) Producers always have optimization in mind – minimizing costs, and maximizing profits. In this specific example, the producers of Molson Beer seem to be hoping to maximize their profits – by creating price elasticity, they can raise the price of their product without losing and consumers or decreasing demand for their product.

  30. Samantha R.on 07 Dec 2010 at 9:46 pm

    1. Although usually a particular brand of beer such as Molson would be a luxury with many substitutes, commercials such as this one convince consumers that this is the beer that they "have to have." Because the commercial does such a good job of expressing the things that Canadians are passionate about and proud of, it appeals to them more than other brands of beer such as Labatt's. Because this commercial causes Canadians to only want Molson beer over other brands, people will be more willing to spend a little more money on Molson beer if there is a small price raise; due to the successful commercial, Canadians believe that Molson beer is better than other brands, so they are willing to spend more for "better quality". Therefore, price elasticity has gone down for Molson beer.

    2. It is in a company's best interest to decrease the price elasticity of demand for its product because if a product is inelastic, then people will purchase it no matter the price. If a product becomes less elastic, then it is more likely that consumers will purchase the product even though prices are higher. Therefore, the company can charge more for the same product, and people will still be willing to buy it; the company will have increased profits.

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