In this report I will analysis the price and income elasticity of Ryanair and make a recommendation about the strategy of Ryanair towards further price cuts taking information from the aviation monthly

Income Elasticity: -

Income elasticity is the change in the response to consumer income. If consumers' income increases then there will be a positive increase in demand for products.

The income elasticity of demand is measured by the responsive of the quantity demanded of a good to the income of the people demanding the good. It is measured as the percentage change in demand that occurs in response to a percentage change in income.

Graphically this is shown by the demand curve making a shift to the right.

Similarly if consumers' income falls the demand curve would shift to the left. Income elasticity of demand measures the extent to which demand changes in response to income changes.

The income elasticity can be calculated by the following formula:

The income elasticity of demand is measured by the responsive of the quantity demanded of a good to the income of the people demanding the good. It is measured as the percentage change in demand that occurs in response to a percentage change in income.

Income Elastic:

When income is elastic this occurs when rise a consumers' income will cause a positive increase in demand for consumer spending. When represented on a graph it will show that it is represented as greater than one.

Income Inelastic:

When income is inelastic this occurs when a rise in income will cause a slight increase in demand. When represented on a graph it will show that it is represented as less than one.

What determines how much extra consumer will buy?

. If consumer size of income increases then the more they will demand for products

2. The higher the desire to save less extra they will buy.

3. The more insecure they feel the less likely they are to buy.

4. When the economy is doing well spending will be much higher.

5. Some people may buy more even if the income increase is small, because they like the product a lot.

6. The better the marketing the more people will spend following an increase in income. Hence need to use advertising to make consumers want the product

Ryan Air Analysis: -

Ryanair is a very successful low cost airline who has been increasing size over the past ten years with profits figures within excess of £15 million. Ryan air has now appointed a new regional executive to oversee the possibility of becoming the market leader with possibilities of takeovers.

In an analysis of elasticity towards Ryanair it is quite a fortune proceeding.

After recent events of terrorist with September 11th and the publicity involved with British Airways and Gate Gourmet economists stated in the 'Aviation Monthly' that elasticity for demand had fallen from 1.2 to 0.6.

So due to these key factors the passengers using airline change their mood to going on holiday for a shorter period. The Income Elasticity of Demand for short breaks and holiday flights has risen to 3.7.

Recommendation on Pricing Policy referred to data: -

Knowledge of the price elasticity of demand for a product enables a firm to predict changes in its total revenue following a change in price. Thus by keeping airline prices down to a bare minimum or at least just below their competitors. This would then allow Ryanair to have that edge in the market for one of the biggest low cost airlines in UK.

Task 2: -

Competition Commission: -

The competition commission was established by the Competition Act 1998 and replaced the Monopolies and Mergers Commission (MMC) on 1 April 1999. The Competition Commission carries out inquiries into companies referred to it by the other UK competition authorities Office Fair Trading and other Regulators.

The Competition Commission conducts in-depth inquiries into merger plans between companies, markets and the regulation of the major industries.

Examples of the kind of conduct that may constitute an abuse include:

* The imposition of unfair prices;

* Limiting production, markets or technical developments to the prejudice of consumers;

* Applying dissimilar conditions to equivalent transactions with other trading parties, thus placing them at a competitive disadvantage;

* Making contracts subject to the acceptance of other obligations, which are irrelevant to the subject matter of the contract.

The Director General of Fair Trading is responsible for enforcing the legislation and is given powers to fine companies guilty of anti-competitive conduct or abuse of a dominant position up to 10% of their turnover.

Criteria to Reference to Takeovers: -

The Monopolies and Mergers Act was passed in the government in 1965 to deal with the rising industrial concentration caused by mergers and takeovers. The monopolies commission regulated companies who were created or strengthened a monopoly.

However in Ryanair example the information provided for low cost airlines who are operating in the south are very limited partly because of fewer airports and smaller companies working inside the airports.

Ryanair analysis: -

For Ryanair possibility to takeover 'Buzz' airline at Bournemouth airport will certainly increase there company profits. However, due to Ryan air's recent increase in profits and also in terms of expanding the airline there market share and power has increase. This may lead to an investigation by the competition commission to investigate the possibility of unfair competitive trading then Ryanair might be liable for a considerable fine.

Another reason why the competition commission might investigate Ryanair monolopy strength is the because of the strength they have over the airports in the south of England. It will a well known fact that there are few airports in the south and if the proposal of Ryanair moving there entire maintenance department to Bournemouth that will mean an expansion at Bournemouth airport, more aeroplanes flying into Bournemouth as well.

Task 3: -

Economies of Scale: -

Economies of scale occur when a product is being mass-produced; it results in a lower cost average. Economies of scale occur within a firm (internal) or within an industry (external).

Internal Economies of Scale

These are economies made within a firm as a result of mass production. As the firm produces more and more goods, so average cost begin to fall because of:

* Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively.

* Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc.

* Financial economies made by borrowing money at lower rates of interest than smaller firms.

* Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output.

* Commercial economies made when buying supplies in bulk and therefore gaining a larger discount.

* Research and development economies made when developing new and better products.

External Economies of Scale

These are economies made outside the firm as a result of its location and occur when:

* A local skilled labour force is available.

* Specialist local back-up forms can supply parts or services.

* An area has a good transport network.

An area has an excellent reputation for producing a particular good. For example, Sheffield is associated with steel.

External oconomies result in not only growth and interaction with local companies but also the matter of saturation in the local area as well.

Economies of Scale in Reference to Ryan Air: -

When an industry is concentrated in one area so much like Ryanair the matter of moving their maintenance operations department from Stansted to Bournemouth. The competition commission might look at this proposal as too hostile for the local area because the company provides a large number job that would later become redundant.

However in view of moving to Bournemouth airport the local area would probably except this new proposal due increase jobs and the effect on firms around the local will also benefit from this opportunity.

Start-up capital to move the maintenance operations department would be very costly for Ryanair with only the cost saving in wage rates and the expansion of airport facilities and business to them, this may lead to a long term return plan moving into Bournemouth airport.

Evaluation of the determination of wages rates in local communities: -

Total Household Income per head (£)

As we can see from the table above it show us that the southeast and southwest have a much smaller household income per head.

Appendix: -

TASK1: -

Table 1.1

Relationships between price elasticity and total revenue following a price change

Elasticity

Price change

Change in total revenue

Inelastic

Price fall

Price increase

Fall

Increase

Unitary

Price fall

Price increase

No change

No change

Elastic

Price fall

Price increase

Increase

Fall

Cross-elasticity of demand

"The responsiveness of the change in the quantity demanded of product A to a change in the price of product B."

(See page(s) 145)

Elastic demand

"Quantity demanded that is quite responsive to a change in price."

(See page(s) 122)

Elasticity coefficient

"A number that measures the responsiveness of quantity demanded to a change in price."

(See page(s) 121)

Elasticity of supply

"The responsiveness of quantity supplied to a change in price."

(See page(s) 139)

Income elasticity

"The responsiveness of quantity demanded to a change in income."

(See page(s) 143)

Inelastic demand

"Quantity demanded that is not very responsive to a change in price."

(See page(s) 121)

Price elasticity of demand

"The responsiveness of quantity demanded to a change in price."

(See page(s) 120)

Total revenue

"The total amount of income a firm receives from its sales; formally, it is price multiplied by the quantity of the product sold."

(See page(s) 120)

Unitary elasticity

"The point where the elasticity coefficient is equal to 1, that is, where the percentage change in quantity is exactly equal to the percentage change in price."

(See page(s) 129)

Income Elasticity:

The table below summarises the different values of income elasticity of demand.

A change in income can have a number of effects:

Effect

Income elasticity coefficient

Classification of good

a proportionately larger change in the quantity demanded

>1

Luxury good

a proportionately smaller change in the quantity demanded

<1

Necessity

a negative change in the quantity demanded

<0

Inferior good

Bibliography: -

http://highered.mcgraw-hill.com/sites/0070914591/student_view0/chapter4/glossary.html

www.wikipedia.com

www.bized.com

www.statistics.gov.uk

http://www.statistics.gov.uk/pdfdir/reg0302.pdf

http://strategicsourcing.navy.mil/reference_documents/defs.cfm?ltr=E

Books:

Overhead Study Notes Business Environment Handbook

An Introduction to Modern Economics; Phillip Hardwick, John Langmead 5th edition

Richard E.R. Towch Business Environment 10/05/2007

Assignment No 1

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