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What do you understand by the own-price elasticity of demand for a good?

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Drakakakis Emmanouil Autumn Term 2002-3 Department of Management Economics Essay #1 1. (a) What do you understand by the own-price elasticity of demand for a good? (b) Will a linear (straight line) demand curve have a constant own-price elasticity of demand? Explain your answer. (c) Following the terrorists attacks in the USA on 11 September, there was a marked fall in business travel. In respomse, many hotels cut their prices to business travellers; for example the Hyatt Hotel group offered discounts of up to 50 per cent off regular room rates. Under what circumstances would this lead to increased revenue for these hotels? Before we define the meaning of the own-price elasticity for a good we must understand elasticity and its concept in general. Elasticity is basically a comparison between the sizes of change in the quantity demanded, in the case of the own-price elasticity, of a certain good and in the variable that caused this change. According to Mankiw elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. ...read more.


This is an indication of demand responding to the change of the price of a ceratin good. The second range occurs when demand is inelastic. This happens when the PED value is less than one and the percentage change in quantity demanded is smaller than the percentage change in price. This shows that demand does not respond to the change of the price of a good. The third range occurs when demand is unit elastic. This happens when the PED is equal to one and the percentage of the change in quantity demanded is equal to the percentage of the change in price. This indicates that demand remains the same whatever the price. The fourth range happens when demand is perfectly elastic. When that occurs PED is equal to infinity and a slight price change leads to an infinite demand of quantity. The fifth range is when demand is perfectly inelastic and the value of PED equals zero. This occurs when the percentage change in price equals zero. There are differentiations in those values of elasticity of demand according to certain determinants which affect the price elasticity of demand. ...read more.


Finally, as for (c) it is necessary to note the fact that business travelling and business accomodation are goods consumpted jointly. That is very common, usually with professionals who travel often and need a residence, which happens to be a rented, hotel residence. Despite that, the terrorist attacks and the subsequent repurcusion this had in economy as a whole brought a downfall in business travelling. The hotels in order to manage this crisis effectively reduced their prices and offered discounts in order to increase the quantity of customers visiting them. If we consider the law of demand in this case, hotel reservations should increase in this period as well as the total revenue of the business but this would happen when the price elasticity of demand is elastic. This happens when the percentage change in quantity is larger than the percentage change in price. Concluding, we would easily say that it is assume that the hotels would increase their total revenue with discounts and better prices but this is not always the case. There are other factors influencing customer behaviour after these terrorist attacks that would not be easily predicted or affluenced. ...read more.

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