Does marketing raise costs/profits?

Question:

In one of our classes we learned about marginal cost of producing a certain product. The lesson says that a company can produce a specific amount of a certain product in order to maximize its profits. After that specific amount (for example 1000 units of a certain product) the company starts to lose profit. (Each new unit doesn’t bring any profit). That’s it about the marginal cost. I’m just wondering how companies use marketing campaigns and make more sales if producing more products results in higher production costs. For example: A company maximizes it’s profits at 500 units. The company then launches a marketing campaign which goes very well and now the demand for its products is let’s say 700 units. How do companies handle this? The only explanation I can think of would be raising the price, but on the other hand a higher price would lower the demand.

Answer:

You asked how a monopolist might use marketing campaigns to increase profit.  As you discussed, marketing efforts would likely result in consumers willing to pay more, shifting the demand out.  This can only be good news for the firm if ignoring the marketing costs.  Let’s remind ourselves that the monopolist is essentially choosing a point on the demand curve that maximizes profit.  Since the demand has shifted out, the firm can both produce and charge more than before, which would strictly improve revenue.  Exactly how much more to produce (which determines how much more to charge) depends on how much more it costs to produce additional units.  More precisely, this is where the optimality condition equating the marginal revenue, which has shifted out, and the marginal cost comes into play. 

Answered by
  • Assistant Professor
Last updated on
July 21, 2022

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