Increasing advertising in Figure 5.21 therefore shifts the TC curve upwards to TC2 and so long as the advertising is successful, the demand curve shifts outwards and the TR curve upwards. In this case, the TR curve shifts to TR2 and the firm achieves maximum profit at an increased output of Q2 and a price of P2.
Successive increases in advertising should shift the demand curve further to the right, but due to diminishing returns to advertising, these successive shifts will become smaller for equal increments in advertising. The optimal level of advertising would be determined where the additional revenue generated by the increased demand from advertising matches its extra cost.
The model we have developed therefore proves a valuable tool for analysing a realistic scenario