Why do firms advertise?
In free market price is determined by demand and supply. The production takes place on quantity where demand equals supply, that amount is produced and sold. This is described below: Goods are sold at price p and quantity q is sold. Demand equals supply at point E which is called equilibrium, because there is no reason for change. Anyway it can happen that either the demand or supply curve shifts due to some reasons. Those reasons for demand are the change in income, prices of other goods (complement and substitutes), change in population, legislation or in fashion and the amount of advertising. If any of those moves in favor (income rises, more advertising etc.) the demand curve shifts right and new equilibrium is set. This is shown below: As seen the new equilibrium quantity q is bigger than old q and the new price p is bigger than the old p. So that means that the firms can now sell more with higher price, so it is very profitable for them when some of the conditions of demand moves
