What is Advertising Elasticity of Demand (AED)?

Advertising Elasticity of Demand (AED)

The advertizing stretchyity of direct (AED) measures the reactivity of changes in the beat demanded to changes in the level of announce. It is calculated exploitation the sideline formula;% change in demand

% change in advertising expenditure

The calculation of the AED impart produce a honour. This look upon will indicate some of the characteristics of the good. For instance;·A value over 1 implies a relatively elastic demand. In other words, an increase in the level of advertising will safari a pro rata greater increase in the demand for the good. ·A value less than 1 implies a relatively inelastic demand. In other words, an increase in the level of advertising will bring in a proportionately smaller increase in the demand for the good. The sign indicates how advertising influences the demand. For most goods, an increase in the level of advertising should cause the demand curve to transform to the right (D1 to D2).The magnitude of the shift will depend on the value of the AED. For instance, if the AED is relatively elastic (greater than 1) then the change in the quantity demanded will be proportionately larger than the change in the level of advertising.



The following is an example of how to calculate the AED:Original level of advertising = £100Original quantity = 50 unitsNew level of advertising = £120New quantity = 75 unitsIt is ostensible that a £20 increase in the level of advertising results in a 25 unit increase in the quantity demanded. The advertising elasticity of demand is% change in demand

% change in advertising expenditure

50%

20%

= + 2.5Therefore, the advertising elasticity of demand is 2.5, which is termed as relatively elastic. In other words, a 1% increase in the level of advertising will cause a 2.5% increase in the quantity demanded.

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