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IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand

A general insurer's advertising raised sales by 6% in the year of a campaign, but advertising elasticity measured one year later shows a further sales gain of 2% with no extra spending. Which concept does this later gain illustrate?

This illustrates the carry-over or lagged effect of advertising. Awareness and brand impressions created by the campaign continue to influence purchases in later periods, so sales rise further even without new spending. It is not a price effect or a competitor effect.

  1. AThe carry-over (lagged) effect of advertising on demandCorrect
  2. BThe law of diminishing marginal utility of insurance
  3. CA shift along the demand curve caused by a price fall
  4. DA negative cross elasticity of demand with a competitor
  5. Pure informative advertising having no persuasive effect

Explanation

Advertising can influence purchases after the period of spending through brand awareness and memory; this is the carry-over or lagged effect. No price change occurred, so there is no movement along the demand curve. Nothing in the data refers to a competitor.

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