What is Advertisement Elasticity of Demand?
The advertisement elasticity of demand is a degree of responsiveness of a change in the sales of a product with respect to a proportionate change in advertisement expenditure.
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Every organisation spends a certain amount on advertisement and other promotional activities with an aim to create awareness among customers and boost sales. The effectiveness of elasticity of demand decides the sales of an organisation. Thus, is it important for the organisation to determine how advertisements affect its sales.
By measuring the advertisement elasticity of demand, an organisation can determine optimum level of advertisement expenditure under various situations, such as government’s restrictions on the cost of advertisement and high competition.
Advertisement Elasticity of Demand Formula
The advertisement elasticity of demand (eA) can be calculated using the following formula:
eA =
Percentage Change in quantity demanded
—————————————————————–
Percentage Change in advertisement cost
Mathematically, advertisement elasticity (eA) can be expressed as:
eA = (∆Q /∆A) X (Q/A)
Where,
∆Q =Q1 – Q
∆A = A1 – A
Q is the original quantity demanded
Q1 is the new quantity demanded
A is the original advertisement cost
A1 is the new advertisement cost
Advertisement Elasticity of Demand Example
Suppose the advertisement expenditure of an organization
increases from ₹25,000 to ₹60,000. Consequently, the demand of the organization’s products increases from 40,000 units to 70,000 units. Calculate the advertisement elasticity of demand.
Solution: Here,
∆D = 70000 – 40000 = 30000 units
∆A = ₹60,000 - ₹25,000 = ₹35,000
The formula for calculating the advertisement elasticity of demand is:
eA = (∆D /∆A) X (D/A)
Substituting the values in the formula
eA = (30000 /35000) X (40000/25000) = 1.2 (greater than one)
The advertisement elasticity of demand ranges from eA = 0 and eA = ∞, which is shown in Table:
| NUMERICAL VALUE OF ADVERTISEMENT ELASTICITY OF DEMAND | DESCRIPTION |
|---|---|
| eA=0 | When a proportionate change in advertisement expenditure does not result in any proportionate change in the demand of an organisation. |
| eY >0 but <1 | When a proportionate change in advertisement expenditure results in a comparatively less proportionate change in the total demand for products. |
| eY =1 | When a proportionate change in advertisement expenditure results in an equal proportionate change in total demand for products. |
| eA >1 | When a proportionate change in advertisement expenditure results in a comparatively higher proportionate change in the total demand for products. |
Factors Affecting Advertisement Elasticity of Demand
The concept of advertisement elasticity of demand is an important aspect especially while making decisions related to promotional activities. The advertisement elasticity of demand is influenced by a number of factors.
Some of these factors affecting advertisement elasticity of demand are explained as follows:
Product launch
Generally, at the time of a new product launch in the market, the advertisement elasticity of demand is greater than unity. This is because at that time the aim of the advertisement is to create awareness of the product among customers.
After the sales goes up, the advertisement elasticity of demand decreases. On the contrary, once the product is well-established in the market, the aim behind advertising is to attract new customers and create additional demand. In this case, the advertisement expenditure increases while an increase in demand is less.
Advertisement by competitors
Advertisement elasticity of demand is influenced by advertisements being produced in the market by competitors. In a highly competitive market structure, the effectiveness of the advertisement of an organisation is determined by the amount spent and effectiveness of advertisements of its competitors.
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