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Word Count: 284
Advertising Elasticity of Demand AED The advertising elasticity of demand AED measures the responsiveness of changes in the quantity demanded to changes in the level of advertising It is calculated using the following formula change in demand change in advertising expenditure The calculation of the AED will produce a value This value will indicate some of the characteristics of the good For instanceA value over 1 implies a relatively elastic demand In other words an increase in the level of advertising will cause a proportionately 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 cause 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 shift to the right D1 to D2The 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 advertisingThe following is an example of how to calculate the AEDOriginal level of advertising 100Original quantity 50 unitsNew level of advertising 120New quantity 75 unitsIt is evident 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 25Therefore the advertising elasticity of demand is 25 which is termed as relatively elastic In other words a 1 increase in the level of advertising will cause a 25 increase in the quantity demanded
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