Advertising elasticity of demand (AED)
Advertising elasticity of demand
Advertising elasticity of demand is a measure of how much advertising expenditure affects the demand for a good or service.
Advertising elasticity of demand (AED) is a useful measure of advertising effectiveness. It measures the percentage change in demand for the product or service compared to the percentage change in the level of advertising expenditure.
Formula:
The value that is derived as a result for the advertising elasticity will vary from zero to infinity. As before, the now familiar descriptions are used:
| Value | Description |
|---|---|
| 0 | Perfectly inelastic |
| Under 1 | Inelastic |
| 1 | Unitary |
| Over 1 | Elastic |
| Infinity | Perfectly elastic |
Significance of AED sign
If the value for AED that is calculated is below one, then the product is said to be inelastic in response to advertising expenditure. This means that an increase in advertising expenditure of, say 20%, has led to a growth in demand for the product of less than 20%. The lower the value of the AED, the less effective advertising expenditure has been at boosting demand.
A value of greater than 1 indicates that the demand for the product is highly responsive to changes in advertising expenditure. This means that an increase in advertising expenditure will generate a greater increase in demand for the product.
Limitations of the AED value
However, while the AED value may be very useful, a simple numerical interpretation of the value may not be entirely appropriate for a number of reasons. These might include:
- The purpose of a lot of advertising may not be to directly boost demand, but to help with building a brand image or brand loyalty - the AED value cannot show the effectiveness of this strategy
- If dealing with a family of brands, it may be difficult to isolate the effect of the advertising spending on a single product or service and this may distort the apparent effectiveness of the expenditure
- It may be difficult to isolate the impact of advertising expenditure to a specific time period - some campaigns are ongoing over a considerable period and other factors may also influence demand over an extended period
As in all things economics, the assumption of ceteris paribus applies - that is, all else remains equal. In other words the assumption is that demand can only be affected by one variable at a time. In reality, of course, demand may be affected by price, income and adverting all at the same time, and consequently it may prove difficult to isolate the exact variables affecting demand and the strength of each variable.
