Advertising elasticity of demand
Encyclopedia
Advertising elasticity of demand (or simply advertising elasticity, often shortened to AED) is an elasticity
measuring the effect of an increase or decrease in advertising on a market. Although traditionally considered as being positively related, demand for the good that is subject of the advertising campaign can be inversely related to the amount spent if the advertising is negative.
for a good. AED is used to measure the effectiveness of this strategy in increasing demand versus its cost. Mathematically, then, AED measures the percentage change in the quantity of a good demanded induced by a given percentage change in spending on advertising in that sector:
In other words, the percentage by which sales will increase after a 1% increase in advertising expenditure assuming all other factors remain equal (ceteris paribus
). AED is usually positive. Negative advertising may, however, result in a negative AED.
(PED) for the same good. The optimal relationship is denoted by:
In words, "to maximize profit, the firm's advertising to sales ratio should be equal to minus the ratio of the advertising and price elasticities of demand." As noted by Pindyck and Rubinfeld, firms should advertise heavily if their AED is high (they get a lot of bang for their advertising buck) or if their PED is low (since for every added sale there is significant profit).
Thus, a comparison of PED and AED can also be used to determine whether more advertising is the correct strategy to maximise profits (e.g. for Heinz
in the market for baked beans
), or changing prices (as with supermarket own brands).
:
The elasticity figures are surprisingly low. Both the beer and cigarette industries advertised heavily. The answer is that the coefficients are for industry-wide demand not firm demand; the AED for individual brands would be substantially higher.
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...
measuring the effect of an increase or decrease in advertising on a market. Although traditionally considered as being positively related, demand for the good that is subject of the advertising campaign can be inversely related to the amount spent if the advertising is negative.
Definition
Good advertising will result in a positive shift in demandDemand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
for a good. AED is used to measure the effectiveness of this strategy in increasing demand versus its cost. Mathematically, then, AED measures the percentage change in the quantity of a good demanded induced by a given percentage change in spending on advertising in that sector:
In other words, the percentage by which sales will increase after a 1% increase in advertising expenditure assuming all other factors remain equal (ceteris paribus
Ceteris paribus
or is a Latin phrase, literally translated as "with other things the same," or "all other things being equal or held constant." It is an example of an ablative absolute and is commonly rendered in English as "all other things being equal." A prediction, or a statement about causal or logical...
). AED is usually positive. Negative advertising may, however, result in a negative AED.
Applications
AED can be used to make sure advertising expenses are in line, though an increase in demand may not be the only desired outcome of advertising. The rule of thumb combines the AED with a known price elasticity of demandPrice elasticity of demand
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price...
(PED) for the same good. The optimal relationship is denoted by:
In words, "to maximize profit, the firm's advertising to sales ratio should be equal to minus the ratio of the advertising and price elasticities of demand." As noted by Pindyck and Rubinfeld, firms should advertise heavily if their AED is high (they get a lot of bang for their advertising buck) or if their PED is low (since for every added sale there is significant profit).
Thus, a comparison of PED and AED can also be used to determine whether more advertising is the correct strategy to maximise profits (e.g. for Heinz
H. J. Heinz Company
The H. J. Heinz Company , commonly known as Heinz and famous for its "57 Varieties" slogan and its ketchup, is an American food company with world headquarters in Pittsburgh, Pennsylvania.Perhaps best known for its ketchup, the H.J...
in the market for baked beans
Baked beans
Baked beans is a dish containing beans, sometimes baked but, despite the name, usually stewed, in a sauce. Most commercial canned baked beans are made from haricot beans, also known as navy beans – a variety of Phaseolus vulgaris – in a sauce. In Ireland and the United Kingdom, a tomato...
), or changing prices (as with supermarket own brands).
Examples
The following are for industry-wide AEDs, researched in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
:
- Beer: 0.0
- Wine: 0.08
- Cigarettes: 0.04
- Recreation: 0.08
The elasticity figures are surprisingly low. Both the beer and cigarette industries advertised heavily. The answer is that the coefficients are for industry-wide demand not firm demand; the AED for individual brands would be substantially higher.