Introduction advertising unit Structure

ECONOMIC AND SOCIAL ASPECTS OF 
ADVERTISING 
Unit Structure : 
 
8.0 
Objectives of the lesson 
8.1 
Introduction 
8.2 
Effects of Advertising on Production Cost 
8.3 
Effects of Advertising on Distribution Costs 
8.4 
Effects of Advertising on Consumer Prices 
8.5 
Advertising and Monopoly 
8.6 
Wastes in Advertising 
8.7 
Social Aspects of Advertising 
8.8 
Ethics in Advertising 
8.9 
“Truth” in Advertising 
8.10 Summary 
8.11 Questions 
8.0 OBJECTIVES OF THE LESSON
 
After completion of this lesson the student will be able to 
understand: 
Effects of Advertising on Production Cost
Effects of Advertising on Distribution Costs
Effects of Advertising on Consumer Prices
Advertising and Monopoly 
Waste in Advertising 
Advertising and Cultural Values 
Advertising and Standard of Living 
Ethics in Advertising 
“Truth” in Advertising 

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8.1 INTRODUCTION
A business has an optimum (or maximum) level of production 
which it can manage, at any given time, at the lowest cost per unit, 
depending on its present equipment and facilities. These factors 
are the main determinants in deciding whether advertising raises, 
or lowers down the cost of production. 
8.2 EFFECTS OF ADVERTISING ON PRODUCTION 
COST
Advertising is generally believed to lower down the production 
cost. This opinion is based on the assumption that by stimulating 
demand, it is quite possible for advertiser to reduce production cost. 
If advertising leads to an increase in sales volume, the 
manufacturer due to economies of large scale production permits 
the producers to buy in large quantities and receive sufficient 
quantity discounts from his suppliers. Economies of scale can also 
include savings in transportation, in utilization of plant and 
personnel, and in over head expenditure. The general experience 
is that mass production reduces the real cost of products. 
Advertising also lowers the overhead costs of production by 
generating demand. Through advertising, a manufacturer with a 
considerable seasonal demand may be able to expand the demand 
over a broader time period. The producer can have economies of 
reduced storage capacity, because he needs lesser storage space 
for lesser period of time as the products are being sold over a 
larger time period during the year. The larger turnover would mean 
that during the season the storage space would be used 
extensively. This in turn would mean that larger number of units of 
production would be sharing the overhead costs and this would 
help reduce that cost of production. 
Every manufacturing unit has an optimum production, which 
determines whether the advertising increases or decreases the cost 
of production. The cost of production involves : (a) Material cost (b) 
Labour cost, and (c) Overhead cost. 
Suppose a unit having one machine in a room which is 
operated by the owner himself produces 2,000 units per month. 
The total production cost, inclusive material cost, labour cost, 
overhead costs amounting to Rs.2,000. To produce 2,000 units the 
owner spends Rs. 2,000. In this case the cost per unit is Re. 1/-. 
However, the same unit can make an additional 2,000 units at a 
marginal cost of Rs. 800 being the cost of advertising and other 
inputs that would be required. Thus, it can be concluded that 

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advertising can bring down the cost of production from Re. 1/- to 
Re. 0.80/- per unit as is evident from Table.