Advertising elasticity of demand (AED) measures the responsiveness of a product’s demand to changes in advertising expenditure. It is calculated as the percentage change in the quantity demanded of a product or service divided by the percentage change in advertising spending for that product or service. A high elasticity indicates that changes in advertising spending have a significant effect on the quantity demanded, while a low elasticity suggests that advertising spending has little impact on demand.
Imagine if a company decides to double its advertising budget for a new toy. If, as a result, a lot more kids want the toy (meaning the demand goes up significantly), then the toy’s advertising elasticity is high. This means the ads were effective in making more people want to buy the toy. If hardly any more toys are sold despite the extra ads, then the advertising elasticity is low, indicating that the ads didn’t do much to increase demand.
In Economics, Advertising elasticity is crucial for marketers and businesses in planning and evaluating their advertising campaigns. It helps in understanding the potential return on investment (ROI) from advertising expenses and in making decisions about how much to spend on ads. This concept is also important in economic studies of market behavior and consumer response to marketing efforts.
For example, a beverage company increases its advertising budget by 20%, leading to a 10% increase in demand for its product. The advertising elasticity would be 0.5, indicating a less than proportionate response in demand relative to the increase in advertising spending. Similarly, a tech company launches a major advertising campaign for a new smartphone, resulting in a 50% increase in sales following a 25% increase in advertising expenditure. This yields an advertising elasticity of 2, suggesting a highly effective advertising strategy.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy