Concept and Degree of Advertisement Elasticity of Demand

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Concept of Advertisement Elasticity of Demand

The advertisement expenditure has a direct effect on the demand for goods and services. In all modern businesses, advertisement plays a very important role. An increase in advertisement expenditure leads to an increase in the sale of a commodity. As advertisement has a saturation point, sales quantity increases up to a saturation point, and then it declines even if advertisement expenditure has increased by the businesses. The effect of advertisement expenditure by the firm on the demand for their product can be measured by advertisement elasticity of demand. This article describes the concept and degree of advertisement elasticity of demand.

Advertisement elasticity of demand is also known as the promotional elasticity of demand. It quantifies the change in quantity demand as a result of a change in advertisement expenditure. More specifically, it can be defined as the promotional change in quantity demanded of a product due to a proportional change in advertisement spending by the business firm. So, it is the ratio of the percentage change in the demand for a commodity with the percentage change in the advertisement expenditure as a promotional expenditure. Following is the formula to measure the coefficient of advertisement elasticity of demand.

EA= Proportionate or Percentage change in quantity demanded/Proportionate or the percentage change in the advertisement or promotional expenditure

EA = (ΔQ/Q)*100/ (ΔA/A)*100 = (ΔQ/ΔA)*A/Q

Where Q= Initial quantity; A=Initial units of advertising expenses; ΔQ= change in quantity demanded of goods; and ΔA= change in advertising expenses or the promotional expenses

Degrees or Types of Advertisement Elasticity of Demand

The advertisement elasticity coefficient is generally positive. The major types or degrees of advertisement elasticity of demand can be briefly explained below.

Relatively Elastic Demand (EA>1)

When a percentage change in quantity demand of a product is higher than the percentage change in advertisement expenditure by a firm then this is the case of the relatively elastic advertisement or case of advertisement elasticity of demand greater than one. It means a relatively lower percentage change in promotional expenditure beings a higher percentage increase in the quantity demand of a product.

Unitary Elastic Demand (EA=1)  

It is the situation in which the percentage change in quantity demand is equal to the percentage change in advertisement expenditure of the firm. If a certain percent increase in advertisement expenditure brings an equal percentage change in sales volume of the business firm then promotional elasticity is equal to one.

Relatively Inelastic Demand (EA<1)

When the percentage change in quantity demand of a commodity is less than the percentage change in advertisement expenditure of the business firm then it is relatively inelastic demand resulted from the advertisement. It means a certain percentage change in the promotional expenditure by the business firm brings a change in sales volume by lower percentage then it is the case of advertisement elasticity of demand less than one.    

The following table shows the summary of degrees or types of advertisement elasticity of demand.

Value of ElasticityType / DescriptionMeaning
EA>1Elastic% change in demand/sales is higher than the % change in advertisement expenditure.
EA=1UnitaryBoth are equal
EA<1Inelastic% change in demand/sales is lower than % change in advertisement expenditure.
Concept and Degree of Advertisement Elasticity of Demand

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