The advertisement elasticity of demand is a degree of responsiveness of a change in the sales of a product with respect to a proportionate change in advertisement expenditure.

Every organisation spends a certain amount on advertisement and other promotional activities with an aim to create awareness among customers and boost sales. The effectiveness of elasticity of demand decides the sales of an organisation. Thus, is it important for the organisation to determine how advertisements affect its sales.

The advertisement elasticity of demand (eA) can be calculated using the following formula:

eA =

Percentage Change in quantity demanded
—————————————————————–

eA = (∆Q /∆A) X (Q/A)

Where,
∆Q =Q1 – Q
∆A = A1 – A

Q is the original quantity demanded
Q1 is the new quantity demanded

increases from ₹25,000 to ₹60,000. Consequently, the demand of the organization’s products increases from 40,000 units to 70,000 units. Calculate the advertisement elasticity of demand.

Solution: Here,
∆D = 70000 – 40000 = 30000 units
∆A = ₹60,000 `-` ₹25,000 = ₹35,000

eA = (∆D /∆A) X (D/A)

Substituting the values in the formula

eA = (30000 /35000) X (40000/25000) = 1.2 (greater than one)

The advertisement elasticity of demand ranges from eA = 0 and eA = ∞, which is shown in Table:

The concept of advertisement elasticity of demand is an important aspect especially while making decisions related to promotional activities. The advertisement elasticity of demand is influenced by a number of factors.

Some of these factors affecting advertisement elasticity of demand are explained as follows:

### Product launch

Generally, at the time of a new product launch in the market, the advertisement elasticity of demand is greater than unity. This is because at that time the aim of the advertisement is to create awareness of the product among customers.

After the sales goes up, the advertisement elasticity of demand decreases. On the contrary, once the product is well-established in the market, the aim behind advertising is to attract new customers and create additional demand. In this case, the advertisement expenditure increases while an increase in demand is less.

Also Read: Price Elasticity of Demand