Economics of Advertising - Economics for the CEO

Advertising is a pure form of selling cost. This chapter illustrates the general approach of managerial economics to various kinds of marketing or selling outlays.

Nature of Advertising Costs

Advertising costs ae designed to increase the demand for the firm's products. Advertising expenditures shift the demand curve to the right of where it would otherwise be.

Selling costs are incurred to the get the business. Production and distribution costs create the product and take it to the market.

Pure selling costs are designed to shift the demand schedule, i.e., to obtain sales that would not otherwise have been obtained at the same price. Selling have no functional relationship to production output. They are a cause of sales or some part of sales. In the short run sales and hence profit depend on the combinations of price, product improvement or specified quality, advertising outlay and other selling activities. These four influences are interactive. Advertising can shift the demand curve to the right and also can make demand less elastic.

Promotional Elasticity of Demand

Promotional elasticity of demand measures the responsiveness of sales to changes in the amount of advertising with constant price. Like other elasticity measures, it is the ratio of proportionate chagne in sales to the proportionate change in the advertising that causes the change.

Long-Run Aspect of Advertising

Advertising has long-run impacts apart from shifting the short term demand to the right. It helps a firm to attain strategic advantage in market position and gives it a security that contributes to he long-run profit maximization.

The further discussion in the chapters focused on three issues.

1. The level of the total advertising expenditure over a period of years.
2. Fluctuations in the annual outlays over the course of a business cycle.
3. Measuring the effects of advertising for planning and control purposes.



1. The Level of Advertising Expenditure

The theory of monopolistic competition provided an opportunity to analyze advertising expenditure and its effect on profit for a monopolist.

Simple theory of behavior of advertising expenditure and its impact: Ad expenditure includes all pure selling costs in the theory. The marginal cost of advertising comes down initially and then it goes up in the short run. A firm can go on advertising till the marginal cost of advertising becomes equal to gross profit (gross profit assumed to be constant).


Methods for determining total advertising budget: While the theoretical rule of marginal cost equal to gross profit on a unit is rational, firms use more simple thumb rules. They are further discussed in the chapter.

a. Percentage of sales approach
b. All-you-can-afford approach
c. Return on investment approach
d. Objective and task approach
e. Competitive parity approach

2. Cyclical Fluctuations

3. Measuring the effects of advertising for planning and control purposes.

One has to measure how much the firm's demand schedule has shifted as a result of a specified among of advertising outlay. Historical data if available can be studied in two ways. (i) by comparing firms with different advertising outlays and (ii) by comparing a firm's performance over time with different advertising outlays.

While Joel Dean's book authored in 1951 has pointed out that economics of advertising is an important managerial economics issue for top management, it has not provided much content. One has to see the contribution of subsequent authors in this topic to get more useful direction.

Reference: Managerial Economics by Joel Dean

Originally posted at
http://knol.google.com/k/narayana-rao/economics-of-advertising-economics-for/2utb2lsm2k7a/3134
Kindly Bookmark and Share it:

10 comments:

  1. At the very 1st, I’d favor to state thanks to you for this enlightening article. Second, I'd prefer to wonder wherever I can learn a lot more info concerning your post. I arrived right here via Bing and can't discover any associated web websites connected to this matter. How do I sign for your web blog? I had prefer to stick to your http://www.promptessay.com/ updates as they arrive along! I'd a query to interrogate but I forgot what it absolutely was... anyways, thank you very much.

    ReplyDelete
  2. very good article,essaymarket.co.uk maybe it should help me))

    ReplyDelete
  3. I am interested in this theme. http://www.online-essay-writer.org/ Thank you for useful paper.

    ReplyDelete
  4. Want to offer for you a user-friendly platform to businesses and individuals to Post Free Ads.
    Post Free Ads or get free account via Facebook Login in one click.
    Get more with free advertising at postallads4free.com

    ReplyDelete
  5. Such useful post. http://online-essay-writer.org/ I found it very informative.

    ReplyDelete
  6. I'd like to thank you for sharing such useful information.http://www.online-essay-writer.org/ I always read your posts.

    ReplyDelete
  7. I am glad to have found your post. http://www.online-essay-writer.org/ This post is so interesting to everyone)

    ReplyDelete
  8. This comment has been removed by the author.

    ReplyDelete
  9. The phd motivation letter is what a students must understand it's importance.It provides best techniques to write letters.

    ReplyDelete
  10. MPCDF Technician Assistant Grade 3 Recruitment 2016


    Thanks for author for providing amazing information in the post............

    ReplyDelete

 
Designed By An Insurance | Proudly Powered by Blogger