Elasticity of Advertising Ted Mitchell

How to Increase Unit Sales Increase Product Quality Offer more Product Features/Service Increase Advertising/Shelve Space Increase Number of Salesmen Lower the Selling Price

Increase the Advertising Quantity Sold Q = kA Advertising Effort A ???

Increase the Advertising Quantity Sold Q = kA Advertising Effort A ???

Increase the Advertising Advertising Effort Quantity Sold A X X A1 Q1 Q2 A2

Increase the Advertising Advertising Effort Quantity Sold A X X A1 Q1 Q2 A2

We want to know the elasticity of advertising! For a $30,000 increase in advertising effort how many more units will we sell?

Period 1Period 2∆P = P2 –P1 %∆P = ∆P/P1 Quantity, Q 813,997818,3494,383 4,383/813,997 = 0.5% Advertising, A 1,640,0001,660,00020,000 20,000/1,640,000 = 1.2% Elasticity of Advertising %∆Q/%∆A = 0.5%/1.2% = 0.44

Period 1Period 2∆P = P2 –P1 %∆P = ∆P/P1 Quantity, Q 813,997818,3494,383 4,383/813,997 = 0.5% Advertising, A 1,640,0001,660,00020,000 20,000/1,640,000 = 1.2% Elasticity of Advertising %∆Q/%∆A = 0.5%/1.2% = If we increase advertising by 1%, then we will increase of sales by 0.439%

Elasticity of Advertising = 0.44% Advertising Effort Quantity Sold A X X +1% 0.44%

Period 1Period 2∆P = P2 –P1 % ∆P = ∆P/P min Quantity, Q 813,997818,3494,383 4,383/813,997 = 0.5% Advertising, A 1,640,0001,660,00020,000 20,000/1,640,000 = 1.2% Point Elasticity of Advertising %∆Q/%∆A = 0.5%/1.2% = Arc Elasticity of Advertising %∆Q min /%∆A min = 0.5%/1.2% = In this case Point Elasticity is equal to the Arc Elasticity since the starting point (Q1,A1) is also the minimum values for the denominators

Remember Always use arc elasticity based on the minimum of the two values unless the changes from the starting point are very very small, then use point elasticity Using the minimum values for the denominator makes the starting point irrelevant Minimums in the denominator ensure that only the independent changes in impacts are used in the elasticity

Definitions are Important If Elasticity of Advertising = X% Then a 1% change in advertising will result in a X% change in the quantity sold

Sample Exam Question #1 Your current advertising elasticity has been estimated by market research to be 0.75 and you plan to increase you current advertising expense of $500,000 by $200,000 to $700,000. What increase in quantity sold should you anticipated due the bigger advertising effort? %∆Q = Advertising Elasticity x %∆A %∆Q = 0.75 x $200,000/$500,000 %∆Q = 0.75 x 40% = 30% increase in quantity

Sample Exam Question #1 Your current advertising elasticity has been estimated by market research to be 0.75 and you plan to increase you current advertising expense of $500,000 by $200,000 to $700,000. What increase in quantity sold should you anticipated due the bigger advertising effort? %∆Q = Advertising Elasticity x %∆A %∆Q = 0.75 x $200,000/$500,000 %∆Q = 0.75 x 40% = 30% increase in quantity

Sample Exam Question #1 You spent $150,000 on advertising in period 1 and $100,000 on advertising in period 2. The number of units sold due to advertising in period 1 was 20,000units and period 2 only 18,000 units were sold. What is you estimate of the advertising elasticity?

First make a table Period 1Period 2∆P = P2- P1 %∆P = ∆P/? Quantity20,00018,000–2,000 Advertising$150,000$100,000–$50,000 The change in advertising is very large … We Will Use Arc Elasticity Use the minimum points not the starting point in the denominator

First make a table Period 1Period 2∆P = P2- P1 %∆P = ∆P/P min Quantity20,00018,000–2,000 Advertising$150,000$100,000–$50,000 The change in advertising is very large … We will Use Arc elasticity Use the minimum points not the starting point in the denominator

Calculate the Arc Elasticity Period 1Period 2∆P = P2- P1 %∆P = ∆P/P min Quantity20,00018,000–2,000 –2,000/18,000 = –11.11% Advertising$150,000$100,000–$50,000 –$50,000/100,000 = – 50% Arc Elasticity of Advertising = %∆Qmin/%∆Amin = –11.11%/–50% = 0.22

What Did we learn How to estimate the elasticity of advertising from two points The definition of advertising elasticity as the percentage change in units sold for a 1% change in Advertising effort. How to use the elasticity of advertising for predicting changes to sales volume from a change in advertising expense

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