Question

Assume that the advertising to sales ratio of your company’s product is 1.5 and that the price elasticity of demand is -1.5. Determine the advertising elasticity. Explain the meaning of the value of the advertising elasticity. Would you consider spending money in advertising giving that this would increase costs?

Answer 1

Advertising elasticity is found using the rule

Advertising / Total revenue = advertising elasticity / own price elasticity

1.5 x 1.5 = advertising elasticity

advertising elasticity = 2.25

Advertising elasticity is an economic and marketing tool used to measure the response of sales / quantity demanded when there is a change in advertising spending by a given percentage.

Since it is 2.25 in this case, the advertising elasticity is greater than 1. Hence any increase in advertising spending by a given percentage is likely to increases sales by 2.25 times that percentage. Cost will also increase, no doubt, but the sales revenue will cover this cost.