Advertising elasticity of demand

In the modern competitive or partial competitive market economy, advertising has a great signifi­cance. Under advertising, various visible or verbal activities are done by the firm for the purpose of creating or increasing demand for its goods or services. Informative advertising is very helpful for the consumer in making rational purchase decisions.
But the extension of demand through advertising can be measured by advertising or promotional elasticity of demand (EA) which measures the expected changes in demand as a result of change in other promotional expenses. The demand for some goods is affected more by advertising such as the demand for cosmetics. Following is the formula for advertising elasticity,
EA = ΔQ/ΔA x A/Q
Where, Q = quantity sold of good X; A = units of advertising expenses on good X;
ΔQ = change in quantity sold of good X; and ΔA = change in advertising expenses on good X.
The elasticity of demand for a good should be positive because there is the possibility of extension of demand and market for the good with advertising expenditure. The higher the value of this elasticity, the greater will be the inducement of the firm to advertise that product. It is on the basis of advertising elasticity that a firm decides how much to spend on advertising a product.
Factors Influencing Advertising Elasticity of Demand:
The main factors influencing advertising elasticity are as follows:
1. Stage of Product’s Development:
The advertising elasticity of demand for a product may vary with different levels of sales of the same product. It is different for new and established products.
2. Degree of Competition:
The advertising effect in a competitive market is also determined by the relative effect of advertising by competing firms.
3. Effects of Advertising in Terms of Time:
The advertising elasticity of demand depends upon the time interval between advertising expenditure and its effect on sales. This depends on general economic environment, selected media and type of the product. This time interval is large for durable goods than for non-durable goods.
4. Effect of Advertising by Rival Firms:
The advertising elasticity also depends as to how other rival firms advertise in comparison to the advertisement of the firm. This, in turn, depends on the levels of advertisement and advertisements done in the past and present by rival firms.

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