Advertising Elasticity of Demand As you hopefully recall, elasiticy measures the responsiveness of one measure to a change in a factor that may influence that measure. For example, you have probably learned about own-price elasticity of demand, cross-price elasticity of demand, income elasticity of demand, and supply flexibility (supply response to price changes). If we look at own-price elasticity, this gives us a representation of how much we might expect demand to change given a change in the price of a good. We can also think about this concept in terms of marketing. Assume that the goal of advertising (or marketing) is to convince a potential customer to purchase a product. This should not be too much of a stretch. Now consider how might the number of customers change if advertising increased by 10%? Conversely, how many customers will be lost if advertising is reduced by 10%? Perhaps this question is more relevant given current market conditions. As with any elasticity measure, managers need at least two data points to calculate this. Unlike price elasticity, advertising elasticity will almost always (hopefully) be positive. Managers typically fit a constant elasticity model to the data. Advertising Elasticity of Demand (AED) = % Change in Spending on Advertising % Change in Quantity Demanded Advertising :Elasticity\:of\:Demand:(AED)=\: \frac{\%\:Change\:in:Quantity\:Demanded}{\% AED, Constant Elasticity (1) 1:Change :in:Spending\:on:Advertising) In D2 Di = In 1 Say for example, that a firm had the following data. Period Advertising Sales 1 $10,000 $350,000 2 $15,000 $400,000 Advertising Elasticity of Demand As you hopefully recall, elasiticy measures the responsiveness of one measure to a change in a factor that may influence that measure. For example, you have probably learned about own-price elasticity of demand, cross-price elasticity of demand, income elasticity of demand, and supply flexibility (supply response to price changes). If we look at own-price elasticity, this gives us a representation of how much we might expect demand to change given a change in the price of a good. We can also think about this concept in terms of marketing. Assume that the goal of advertising (or marketing) is to convince a potential customer to purchase a product. This should not be too much of a stretch. Now consider how might the number of customers change if advertising increased by 10%? Conversely, how many customers will be lost if advertising is reduced by 10%? Perhaps this question is more relevant given current market conditions. As with any elasticity measure, managers need at least two data points to calculate this. Unlike price elasticity, advertising elasticity will almost always (hopefully) be positive. Managers typically fit a constant elasticity model to the data. Advertising Elasticity of Demand (AED) = % Change in Spending on Advertising % Change in Quantity Demanded Advertising :Elasticity\:of\:Demand:(AED)=\: \frac{\%\:Change\:in:Quantity\:Demanded}{\% AED, Constant Elasticity (1) 1:Change :in:Spending\:on:Advertising) In D2 Di = In 1 Say for example, that a firm had the following data. Period Advertising Sales 1 $10,000 $350,000 2 $15,000 $400,000
