• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain price elasticity of demand, income elasticity of demand and cross elasticity of demand.

Extracts from this document...


a) Explain price elasticity of demand, income elasticity of demand and cross elasticity of demand. (12) b) In 1998 an airline offered very cheap flights from UK to other parts of Europe. However, the service was not very frequent, tickets could not be booked at agencies but directly with the airline, and no meals were offered on the flights. Discuss whether the different elasticity concepts could be useful in explaining this airline's pricing policy for its flights. (13) Part (a) The concepts of price elasticity of demand, income elasticity of demand and cross elasticity of demand are three of the most important economic concepts for a firm in making their pricing decisions. This will be illustrated in the second part of the essay when we examine how these concepts are used to help an airline in its pricing policy. Firstly, price elasticity of demand (PED) is the measure of the responsiveness of a change in quantity demanded of a good to a change in its price, ceteris paribus. The formula for price elasticity of demand is: Price Elasticity of Demand = % change in quantity demanded % change in price of good The value of PED is usually negative to indicate the inverse relationship between price and quantity demanded. ...read more.


If the value of CED is negative, it would indicate that the related good is a complementary good and the goods are used together. A rise in the price of good Y will cause a fall in the demand of good X, causing the demand curve of good X to shift to the left. If the value of CED is positive, the related good is a substitute. A rise in the price of good Y will cause an increase in the demand of good X, causing the demand curve of good X to shift to the right. The magnitude for CED will indicate how closely related the goods are. A larger magnitude would indicate a stronger relationship between the complements or substitutes, while a smaller magnitude would indicate a weaker relationship. For example, hotels and airline tickets are complementary goods while buses and trains are substitutes. Part (b) The airline industry in Europe is an oligopoly. It is dominated by a few large international airlines like, British Airways, Lufthansa and KLM. Very often, these airlines would form alliances to share resources as well as to keep out other competitors. For example, a few airlines would join together to offer a common air miles program as well as offer code-sharing to facilitate ease of transfer. ...read more.


Knowing the income elasticity of demand would enable the airline to predict changes in demand as the consumers' income changes. However, in this case, the airline appears to be in a position to benefit whether consumers' income rises or falls. Since the airline offers very basic services, it may be considered as an inferior good. If the income of consumers falls, passengers who were previously travelling by first class and business class may downgrade to economy class and the demand will rise. This can be seen during a recession when many companies try to cut down on their expenses by forcing their executives to travel by economy instead of first or business class for shorter regional trips. On the other hand, if the economy improves, budget travellers and backpackers who previously used to travel by bus or train may consider upgrading and travel by airplane instead. It seems that this airline has considered all three elasticities carefully in the pricing of its fares as well as the type of services it is offering. By undercutting its competitors, it gained a significant amount of the market. However, it needs to constantly monitor its competitors' prices as well the growth of the economy to prepare itself for changes in demand in the future. It also needs to work with other service providers like hotels and car rental firms in order to increase its market share. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Marketing & Research section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Marketing & Research essays

  1. Distinguish between "a change in demand" and "a change in quantity demanded.

    With an increase in demand, the quantity demanded will be higher at each and every price. Conclusion. In conclusion, to distinguish between a change in quantity demanded and a change in demand, we have to look at the factor that causes the change as well as its effect on the demand curve.

  2. Price elasticity of demand for potatoes.

    If a PES curve were to be drawn it would be steep. (b) Large-scale buying of the surplus by the board has prevented prices from collapsing for the following. As suggested from the data, there has evidently been a good harvest as farmers are able to supply more wheat.

  1. Outline the main reasons why most companies pursue profit maximisation as their main business ...

    Profits act as a reward for risk taking and due to this, are a clear indicator of corporate and business success. When profits are achieved than can be used for many things. They could be paid to shareholders in the form of dividends or reinvested into the company to finance growth (organic growth).

  2. What is meant by price elasticity of demand? How can we measure the elasticity ...

    This method observes the movement in total outlays following price changes. This method allows for easy determinacy of whether demand is relatively elastic, relatively inelastic, or unitary elastic to price changes.

  1. I am going to be writing about the concepts of marketing distinctiveness of the ...

    The use of email can make it easier for customer if they have complaints or comments. They can send a quick email and it will get answered within a few days. Technology keeps developing to allow the customer to make a good choice.

  2. cross elasticity of demand

    One of these determinants is preference. It is a fact that humans would prefer quality goods. Therefore if a good has high quality, customers would prefer to have it hence increasing the demand for that good. Graph 1: Demand and supply graph of DiGi's "1 Low Flat Rate" Graph 2:

  1. In this report I will analysis the price and income elasticity of Ryanair and ...

    - Price Elasticity of Demand: - Price elasticity occurs when the sensitivity of quantity demanded by the consumer' changes in prices to a product. This responsiveness to price change can be split into two sections elastic and inelastic. The formulae to calculate the Price elasticity of Demand can be shown

  2. This is a report on the international dimension of Costa Coffee and Coffee Aroma.

    Sectors include accommodation, food and beverage, meeting and events, gaming, entertainment and recreation, tourism services, and visitor information. 1. Business Sector: Costa is of food and beverage sector. Costa is a tertiary sector business. The tertiary sector of the economy (also known as the service sector or the service industry)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work