• 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. Applied Business Studies

    my theatre shop, and I decided to use this type of pricing strategy, I could sell the older products at a low cost which could then result in my customers buying the new products that are on sale. This type of pricing strategy could work for the number of customers the products are sold to.

  1. 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.

  2. 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).

  1. Price Elasticity of Demand.

    As seen, changes in price and the quantity demanded go hand in hand in everyday situations. Consumer Responsiveness to Price Changes It is useful to watch the consumer as the demand for a product or service change. The knowledge that quantity demand decreases when price increases, and quantity increases when

  2. An investigation into the P.e.d, Y.e.d and X.p.e.d of The Sony Plastation1.

    This means the consumers are aware of changes in the price and reflect on them to whether or not they buy the product. Because of the quite neutral result of P.e.d it shows a balance between a large loss of sales or large gain.

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

    Also the phrase the customer is always right comes in this category, Marketing principles Basic aims of marketing are: Understanding customer needs: organisations need to apply customer needs to make their product successful especially nowadays where markets change in a blink of a eye and there is too much competition

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

    So this way Costa is closer to their consumers and consumers will satisfied with Costa and they will gain brand loyalty. 4. Target Market: Costa Coffee strives to appeal to all ages. Young and Mature, all consumers are bound to be satisfied by their array of choices.

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