According to a survey of U.S. firms, the advertising elasticity of demand is only about 0.003. Does this indicate that firms spend too much on advertising?
It does not indicate too much is being spent. A 100% increase in advertising would translate into a .3% increase in sales, which could represent a heck of a lot of money.
To determine whether firms spend too much on advertising based on the given information, we need to understand the concept of advertising elasticity of demand and how it is interpreted.
The advertising elasticity of demand measures the responsiveness of consumer demand to changes in advertising expenditures. In this case, the survey found that the advertising elasticity of demand is 0.003 for U.S. firms.
A positive value for the advertising elasticity of demand suggests that an increase in advertising expenditures leads to an increase in consumer demand. A value less than 1 indicates that the increase in demand is proportionally smaller than the increase in advertising spending.
In this case, with an advertising elasticity of demand of 0.003, a 100% increase in advertising expenditures would result in only a 0.3% increase in sales. While this may appear to be a small percentage, we need to consider the context and scale of the sales. Even a small percentage increase in sales could represent a significant amount of money for large firms.
Therefore, it cannot be concluded that firms spend too much on advertising solely based on the low advertising elasticity of demand. To make a more informed judgment, it would be necessary to consider other factors like the overall effectiveness of the advertising strategy, profitability, and the competitive environment in the specific industry.