Optimum Selling Costs?
The question arises: how much advertising expenditure will the firm find it worthwhile to incur? Obviously. by spending a certain amount on advertising a producer gets a certain revenue. A firm will incur extra expenditure on advertising when it finds it worthwhile. i.e when it brings additional revenue. So long as the marginal revenue exceeds the marginal cost on advertising. the linn will go on increasing the advertising expenditure and it will stop when the additional (marginal) revenue generated equals extra (marginal) cost incurred. Profit will be the maximum in that position. In order to find the most profitable sales promotion programme. the monopolistic petitor identifies the cost and revenue curves associated with the various sales promotion programmes and on this basis he finds out that particular level of selling costs which would maxine is his profit and he adopts this for his purpose. the price and OM the equilibrium amount. Rs. 1.000 are spent on advertisement. This increases the demand from AR Ito AR 2.The average cost curve ACII. I includes now Rs. 1.000. the cost of advertisement. Now the equilibrium will be at the price 01 land the amount OM I’ This again is the profit maximizing position. Here the output is larger and the price higher than in the original equilibrium. But the important point to note is that the firm docs not bother about the price or the size of the output; it is only concerned with maximising of profit. That is. the total revenue minus total cost must rise by more than Rs. 1.000 when the selling costs amount to Rs. 1.000. Since profits have increased. the firm will he tempted to increase the advertisement expenditure. The profits will be the maximum when. as mentioned before. the marginal revenue equals marginal cost. This situation is represented in the diagram where AR 3 is the average revenue curve. ACA2 is the average cost curve. OP 2 is the price and OM 2 is the output. Beyond this. further expenditure on advertisement will reduce profit since it will add more to the cost than to the revenue. THUS .for a firm under monopolistic competition. corresponding to different levels of selling costs. there are series of average revenue of selling costs. there are series of average revenue curves and average cost curves. The producer has to select that set of cost and revenue curves where the profits arc the maximum.
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