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Understanding Incremental Vs. Average Slopes in Advertising Budget

Learn how to determine optimal advertising strategies using incremental and average slopes in relation to quantity sold, revenue, and profit. Discover why incremental changes are crucial and how they differ from average rates. Gain insights into maximizing advertising ROI.

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Understanding Incremental Vs. Average Slopes in Advertising Budget

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  1. Incremental and Average Slopes Ted Mitchell

  2. Q = ???A Q = Quantity sold x x x x x x x x x x x x x x x x x x x x A = Advertising Budget

  3. Q = kAa Q = Quantity sold x x x x x x x x x x x x x x x x x x x x A = Advertising Budget

  4. Increase in Volume Quantity Sold Q = kAa Q A Advertising Budget

  5. Increase in Volume Quantity Sold Q = kAa Q Q = (Q/A) x A Q/A is the average rate that sales increase for $1 increase in advertising budget A Advertising Budget

  6. Increase in Revenue Revenue R = PQ =PkAa R = (R/A) x A R/A average increase in Revenue for a $1 increase in advertising budget A Advertising Budget

  7. What Does The Profit Curve Look Like? Profit M* 0 A* Advertising

  8. What Does The Profit Curve Look Like? Z = (Z/A) x A Z/A = the average rate at which the profit increases for a $1 increase in advertising budget Profit Zm* 0 A* Advertising

  9. What is the difference between average response and the marginal or incremental response?

  10. Three Slopes Slope of the arc dZ/dA = Slope at a point Profit Z/A =Average Slope 0 Optimal Advertising Advertising

  11. Return on Advertising Expense is always falling as Advertising Increases Profit Z 0 Z = ROAE x Advertising Z = (Z/A) x A Advertising

  12. It is better to use the incremental change rather than the average rate • But changes in averages are harder

  13. You walked from home to school at an average pace of 10 miles per hour • You walked from school to home at an average pace of 5 miles per hour • What was your average pace for the round trip?

  14. You walked from home to school at an average pace of 10 miles per hour • You walked from school to home at an average pace of 5 miles per hour • What was your average pace for the round trip? • Not (10 + 5)/2 = 7.5 miles per hour!!! • Assume the distance was 100 miles • At 10 mph it took 100/10 = 10 hours • At 5 mph it took 100/5 = 20 hours • You walked 200 miles in 30 hours and your average speed was 200/30 = 6.666 mph

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