The objective of this simulation is to illustrate how to calculate and apply the advertising elasticity of demand.

The advertising elasticity of demand is a very important concept that can be applied across a range of areas in business studies. The advertising elasticity of demand measures how the demand for a good changes in response to a change in the level of advertising. It is calculated as the percentage change in quantity demanded divided by the percentage change in level of advertising.

Advertising is very important for firms. In 2000, in the UK the level of advertising expenditure was £14,367 million. This was divided into the following broad types.

It is evident that advertising expenditure on television (£3,949 million) was the largest single spending category. After which there was Regional newspapers (£2,762 million) and National newspapers (£2,258 million).

You can download an Excel version of the original spreadsheet (Excel 97)

The simulation allows the individual to calculate the advertising price elasticity of demand using their own quantity, advertising and price settings, and also apply the consequences of a change in advertising for a given AED.

The model settings for the inputs are;

• Original level of Advertising (£): 50.00 to 200.00
• Original Quantity (Q): 50.00 to 200.00
• New Level of Advertising (£): 50.00 to 200.00
• New Quantity (Q): 50.00 to 200.00
• Price of Good (£): 0 to 25
• Cost of Production per Good (excl Advertising £): 0 to 10
• The AED is (when the AED is set by the user): -2.00 to 2.00
• Change in the Level of Advertising (%): -20.00 to 20.00

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