Advertising elasticity of demand (AED) is a measure of the resilience of a market to advertising penetration increases or decreases. Advertising elasticity is a measure of the efficacy of an advertising campaign in producing new revenue. The percentage change in the quantity requested is determined by dividing the percentage change in advertising spending. A positive elasticity in advertising means that an increase in advertising contributes to an increase in the demand for the products or services advertised.

The effect of revenue of a rise in advertisement spending varies by industry. In order to assess the efficacy of their promotional campaigns, companies often review their advertising-to-sales ratio. A change in demand for a product or service will result in quality ads. Advertising demand elasticity is useful in that it quantifies the shift in demand (as a percentage) through advertising investment in a given market. Simply put, it illustrates how effective a 1 percent increase in advertisement spending is when all other variables are the same in increasing revenues in a particular market.

A commercial for a fairly inexpensive good, such as a hamburger, for example, could result in a fast sales bump. Advertising for a luxury object, such as a pricey car or piece of jewelry, on the other hand, does not see a payback for some time because the product is expensive and less likely to be bought on a whim.

Criticism of AED

Since a variety of external factors such as the state of the economy and customer preferences, may also result in a shift in the quantity of a good requested, the demand elasticity of ads is not the most reliable indicator of the impact of advertising on sales. In a sector where all rivals advertise at the same cost, for example additional ads may not have a direct sales effect.

A good example of this is when a single beer company advertises its product, which forces a customer to buy beer, but not just the particular brand they have seen advertised. Alcohol has an elasticity of 0.0 in the market which means that advertising has no impact on revenues. That said, based on brand, AEDs can vary widely.