|
|
| Line 1: |
Line 1: |
| '''Advertising elasticity of demand''' (or simply '''advertising elasticity''', often shortened to '''AED''') is an [[elasticity (economics)|elasticity]] measuring the effect of an increase or decrease in advertising on a market.<ref name=PindyckRubinfeldPage405to407>Pindyck; Rubinfeld (2001). pp.405-407.</ref><ref name="Png66"/> 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.
| | My name is Enid from Kanerkinden doing my final year engineering in Greek and Roman Culture. I did my schooling, secured 73% and hope to find someone with same interests in Microscopy.<br><br>my website - [http://snakzstock.com/dressup4ever/profile/954401/MoJVL.html Biking for modern life mountain bike sizing.] |
| | |
| == Definition ==
| |
| Good advertising will result in a positive shift in [[demand]] for a good. AED is used to measure the effectiveness of this strategy in increasing demand versus its cost.<ref name="Curran"/> 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:<ref name="Curran">Curran (1999). pp.182-183.</ref>
| |
| :<math>AED = \frac{\%\ \mbox{change in quantity demanded}}{\%\ \mbox{change in spending on advertising}} = \frac{\Delta Q_d/Q_d}{\Delta A/A} </math>
| |
| | |
| 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]]'').<ref name="Png66"/> AED is usually positive.<ref name="Curran"/> 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.<ref name="Curran"/> The rule of thumb combines the AED with a known [[price elasticity of demand]] (PED) for the same good. The optimal relationship is denoted by:<ref name=PindyckRubinfeldPage405to407/>
| |
| :<math>\frac{\mbox{Advertising expenditure}}{\mbox{Sales revenue}} = -\frac{AED}{PED}\mbox{ or, symbolically, }\frac{A}{P.Q} = -\frac{E_A}{E_P}</math>
| |
| | |
| 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."<ref name=PindyckRubinfeldPage405to407/> 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).<ref name=PindyckRubinfeldPage405to407/>
| |
| | |
| 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 [[H. J. Heinz Company|Heinz]] in the market for [[baked beans]]), or changing prices (as with supermarket own brands).<ref name="Curran"/>
| |
| | |
| ==Examples==
| |
| The following are for industry-wide AEDs, researched in the [[United States]]:<ref name="Png66">Png (2007). p.65-66.</ref>
| |
| * 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.<ref name="Png66"/>
| |
| | |
| == Notes ==
| |
| {{Reflist}}
| |
| | |
| ==References==
| |
| {{Refbegin}}
| |
| | |
| * {{cite book|last=Curran|first=John|title=Taking the fear out of economics|url=http://books.google.co.uk/books?id=iBFNU2eOPRIC|accessdate=16 February 2010|date=December 1999|publisher=Cengage Learning EMEA|isbn=978-1-86152-474-4}}
| |
| * {{Cite book|last1=Png|first1=Ivan|last2=Lehman|first2=Dale|edition=3rd|year=2007|title=Managerial Economics|publisher=Blackwell|url=http://books.google.co.uk/books?id=JM6sNd1a5XsC | isbn=978-1-4051-6047-6}}
| |
| * {{Cite book|last1=Pindyck|last2=Rubinfeld|title=Microeconomics|edition=5th|publisher=Prentice-Hall|year=2001}}
| |
| {{Refend}}
| |
| | |
| [[Category:Elasticity (economics)]]
| |
| [[Category:Consumer theory]]
| |
| [[Category:Advertising]]
| |
| [[Category:Demand]]
| |
My name is Enid from Kanerkinden doing my final year engineering in Greek and Roman Culture. I did my schooling, secured 73% and hope to find someone with same interests in Microscopy.
my website - Biking for modern life mountain bike sizing.