managerial economics ch 9

7/23/2019 Managerial Economics Ch 9

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Dr. Karim Kobeissi



Chapter 8: Advertising

Decision



Defnition o Advertising

Advertising includes all the activities by which

visual or oral message are addressed to a

targeted segment o customers with the aim

o inorming and inuencing them to buy the

products or to act avourably towards the

ideas, persons, trademarks or institutions

eatures.



Importance o AdvertisingTo produce a commodity is one thing and to sell it

is another. There is a direct relationship between

advertisement and demand. The sales are likely to

increase i e!penditure on advertisement is increased.

"n the contrary, i e!penditure on advertisement is

reduced, it may lead to a all in sales. Advertising is

essential or creating, increasing and maintaining the

demand or all the products in the present world o

competition. Thereore, advertising orms an integral

part o decision making and orward planning.



Advertising #lasticity o Demand $#A%

The efect o advertisement on the demand o a

product is measured by the advertising elasticityo demand. It measures the responsiveness o demand

to the changes in advertising e!penses.

&here'#A ( Advertising elasticity o demand in percent $)%.

*+ ( Initial demand level

A+ ( Initial advertising e!pense level

* ( -ew demand level



Advertising #lasticity o Demand

The study o the advertising elasticity o demand

concept helps the management in studying the

eect o advertisement on the sales revenue.

/onse0uently, it helps the management in'

% Deciding whether the e!pense on advertisement

should be increased or decreased or maintained

at present level.

1% #valuating the eectiveness o various media o

advertisement.



Advertising #lasticity o Demand $con%

4 I #A 5, advertisement6s e!pense should be

increased.

4 I #A ( , advertisement6s e!pense should be

maintained at present level.- I #A 7 , advertisement6s e!pense should be

reduced which indicates that the more you spend on

advertising, the lower your sales 8 8 8 8 That is a really

bad ad8 9ou should probably fre whomever is in

charge o advertising.



Demand

!epso" has a sot drin# product $ith the ollo$ing:

The initial advertising e%penditures & '()) & A)

The initial *uantity sold & +,))) units & -)

The ne$ spending on advertising & ')) & A/

The ne$ *uantity sold & 0))) units & -/

/1 Compute the advertising elasticity o demand.

+1 2hould !epso" ampliy more its spending on advertising3

01 4 yes, until $hen 3

Advertising elasticity o demand e*ual to /.85

)A ) increase in advertising e!penditures increases demand .: )

) 9es it should because #A 5

);ntil #A ( $saturation point at which e!penditure on advertising should

be maintained%



<ethods or =etting Advertising >udget

There are dierent methods or setting advertising

budget such as' 4 A 6i%ed !ercentage o 2ales Approach'

According to this method, the advertising outlay is

determined as a f!ed percentage on sales which

may be on the sales o past or current or uture

sales. I it is f!ed on uture sales, the sales or acertain uture period are orecasted and the

advertisement e!pense is determined on the

basis o predetermined percentage.



$con%

1 ? All 7ou Can Aford Approach:

According to this method, e!pense on advertising is

determined keeping in view paying capacity o

the frm. I the frm is earning good profts and has

sound li0uid position, it may spend more amount

on advertising. Thus, the advertising e!pense is

determined as a percentage o cash unds

available with the frm.



$con%

2 ? Competitor !arity Approach

;nder this method, advertising e!pense is determined on

the basis o advertising outlays o dierent competitors

engaged in similar business. It is assumed that the

e!pense o a frm on advertising should be su@cient in

creating image o the products o the frm in

comparisons to the products o competitive frms. Thus,

advertisement e!penditure incurred by a particular frm

would depend on its share in total market.



<ethods or =etting Advertising >udget $con%

? b9ective and Tas#

Approach

;nder this method, advertising

e!pense o a frm is determined

keeping in view predetermined

obBectives o the frm $e.g.,

increase awarenessC maintain

demandC increase demandC

respond to a competitor new

advertising campaignC e!tend the

product lie cycle..%.

managerial economics ch 9

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