managerial economics ch 9
TRANSCRIPT
7/23/2019 Managerial Economics Ch 9
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Dr. Karim Kobeissi
7/23/2019 Managerial Economics Ch 9
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Chapter 8: Advertising
Decision
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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.
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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.
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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
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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.
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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.
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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 ( $saturation point at which e!penditure on advertising should
be maintained%
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<ethods or =etting Advertising >udget
There are dierent methods or setting advertising
budget such as' 4 A 6i%ed !ercentage o 2ales Approach'
According to this method, the advertising outlay is
determined as a f!ed percentage on sales which
may be on the sales o past or current or uture
sales. I it is f!ed on uture sales, the sales or acertain uture period are orecasted and the
advertisement e!pense is determined on the
basis o predetermined percentage.
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$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.
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$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.
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<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..%.