Promotional Elasticity of Demand

 MICROECONOMICS


AED measures degree of change in demand brought about by change in advertising expenditure.

Definition: Proportionate change in demand brought about by a unit change in advertising expenditure.

AED can be expressed as

AED = ( Δ Dx)/( Δ AE) x  AE/Dx

Where Dx    = Original (initial) Demand for commodity x ΔDx = Change in demand for x AE    = Original Advertising Expenditure Δ AE = change in Advertising Expenditure It can also be expressed as AED = (% change in Dx)/(% change in AE)

Relatively Elastic Demand

If AED > 1, it is relatively elastic demand. It means that demand is more sensitive to the advertising expenditure and proportionately giving more than proportionate increase in demand. Promotional expenditure is exerting more than proportionate effect on demand e.g. When this soft drink company ‘ Cool ‘ has raised its promotional expenditure by 25%, demand may rise by 50%

AED = % change in Dx% change in AE

= 50 %25 % = 2

AED = 2 (> 1, Relatively Elastic Demand)

Relatively Inelastic Demand If AED < 1, it is relatively inelastic demand. It means that change in advertising expenditure brings about less than proportionate change in demand. E.g. when this soft drink company ‘Cool’ spends 25% additional expenditure on promoting its new product, demand rises only by 5%

AED = % change in Dx% change in AE = 5 %25 % = 0.2

AED = 2 (< 1, Relatively Inelastic Demand)

'''Perfectly Inelastic Demand If AED = 0 it is Perfectly Inelastic demand. It means that increase in advertising expenditure has no effect at all on demand e.g. When the company ‘ Cool ‘ spends 25% additional expenditure on advertising, its new product demand remains rigid or constant. In such a case, advertising strategy is ineffective.

AED = % change in Dx% change in AE = 0 %25 % = 0

AED = 0 (Perfectly Inelastic Demand)

Factors Influencing AED
1.Type of product i.e. whether the product is already existing or new product 2.Brand name. 3.Number of competitors and substitutes in the market. 4.Strategies of competitors 5.Frequency of advertisements. 6.Mode of advertisements. 7.Time of advertisements. 8.Other factors influencing demand like tastes, professions, income etc.

Applications / Uses of AED
1.Helps in evaluating success of adverting campaign. 2.Helps the firms in deciding advertising expenditure or budget. 3.Helps in choosing more effective media for promotion. 4.Helps in withdrawing ineffective promotional campaigns. 5.Helps in strategic management to respond to competitor’s promotional policies. 6.Helps in building brands.

Limitations of AED
1.Value of AED does not help in analyzing effect of advertising a single product. 2.Difficult to analyze the effectiveness of promotional strategies at a particular period of time, especially when the campaigns are over a long period of time 3.The Purpose of campaigns may be to create brands, rather than only influencing size of demand. 4AED does not take into account effect of other factors influencing demand.

Numerical Values of Advertising Elasticity of Demand will vary from zero to infinity.It would mean that if AED is zero,advertisng expenditure has no effect on demand at all.

Unit Elastic Demand

If AED = 1, it is unit elastic demand.

It would mean that advertising expenditure is giving just exactly proportionate returns in terms of demand e.g. This means that if a soft drink company has increased its advertising expenditure by 25%, the demand will also rise exactly by 25%.

AED = (% change in Dx)/(% change in AE) = (25 %)/(25 %) = 1

AED = 1 (Unit Elastic Demand) }}

Quiz on the Topic

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State whether the following statements are True or False:
1.Promotional elasticity of demand measures the sensitivity of income to changes in advertising expenditures 2.Unit Advertising elasticity of Demand brings more than proportionate change in demand in response to advertising expenditure 3.When AED >1; 1, the advertising campaign is effective 4.If AED < 1, the campaign is not successfully utilizing its promotional expenditure. 5. AED does not give us precise effect of advertisements on sales of the specific product at the specific time.

Calculate AED for the following situation
The ‘Big Style company selling T shirts increased its advertising expenditure from Rs 5 Lakhs to Rs 10 Lakhs per annum. Sales of shirts increased from 20 Lakhs shirts per annum to 30 Lakhs shirts annum.

1. Comment on the effectiveness of the advertising situation of the above company.

2. Could there have been any other factors besides advertising influencing demand for shirts? List such other factors.


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