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.
[Pindyck; Rubinfeld (2001). pp.405-407.] Traditionally, it is 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
demand
In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...
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 often change in spending on advertising in that sector:
[Curran (1999). pp.182-183.]
:
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
' (also spelled ') (Classical ) is a Latin phrase, meaning "other things equal"; some other English translations of the phrase are "all other things being equal", "other things held constant", "all else unchanged", and "all else being equal". ...
'').
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. Consequently, an increase in demand might not be the only desired outcome of advertising.
The rule of thumb combines the AED with a known
price elasticity of demand
A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good ( law of demand), but it falls more for some than for others. Th ...
(PED) for the same good. The optimal relationship is denoted by:
[
:
Thus, "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).][
Moreover, 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
The Kraft Heinz Foods Company, formerly the H. J. Heinz Company and commonly known as Heinz (), is an American food processing company headquartered at One PPG Place in Pittsburgh, Pennsylvania. The company was founded by Henry J. Heinz in 1869. ...
in the market for baked beans
Baked beans is a Dish (food), dish traditionally containing white Phaseolus vulgaris, common beans that are parboiling, parboiled and then baking, baked in sauce at low temperature for a lengthy period. Canned baked beans are not baked, but ar ...
), or changing prices (as with supermarket own brands).
Examples
The following are for industry-wide AEDs, researched in the United States
The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
:[Png (2007). p.65-66.]
* Beer: 0.0
* Wine: 0.08
* Cigarettes: 0.04
* Recreation: 0.08
Notes
References
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{{Refend
Elasticity (economics)
Advertising
Demand