Elasticity: Price Elasticity of Demand

Introduction

The elasticity theory is used to evaluate the sensitivity of demand or supply to alterations in variables such as price and income. If the price increases by 100% and demand for cars falls by 200%, then the price elasticity of demand (PED) = -200%/100%= -2. Thus, ignoring the negative sign, PED is greater than 1, which means that demand is price elastic. Consumption of automobiles would decrease as the price increased (Coglianese et al., 2016). Oppositely, the consumption of public transport (PT) would rise since it is a substitute for a car and does not require gasoline expenditure. Demand for PT is price elastic as well, but with a positive sign. There is no direct or significant connection between in-theater movies and petrol expenses. Hence, the demand is perfectly inelastic as consumers’ spending patterns remain the same. The response to changes would occur in the short run because of the easiness of switching from cars to PT. Therefore, only cars and PT consumption would be impacted by the price change.

Income and Price Elasticities of Demand

Income elasticity of demand (YED) assesses the reaction of demand to an income change. Sports cars and premium brand clothes are luxury goods that have high YED. An increase in income will result in a more substantial percentage rise in demand for these products. If a rise in income leads to a fall in demand for an item, then the good has a low negative YED and identifies as an inferior product. Bus travel and cheap supermarket coffee are examples of inferior items where a customer tends to substitute them once wages are raised. PED measures the responsiveness of demand to alterations in a price. A high value of PED is the characteristic of luxury goods since surged charges discourage further consumption of products akin to organic coffee and a holiday to Bali. Oppositely, necessities are the types of products with low price elasticity. A rise in fees for water and food will not prevent consumers from buying them as necessities are vital for basic human existence. Inferior goods can be replaced, while necessities cannot be substituted. Thus, the nature of each product is responsible for the difference in elasticities.

Demand for Movies

Movie theater tickets are normal goods and demand for them can be desirable to be elastic or inelastic. Considering PED, in case of a rise in prices, it is preferable for the demand to be inelastic. Higher prices will not influence consumption significantly so that revenue is not reduced. However, an active response to lower movie ticket prices is favorable, boosting demand for the products as well as profit levels. Based on YED, elastic demand is beneficial in the event of an income elevation. Customers will have more disposable earnings to spend their leisure time in cinemas. Nonetheless, in a contrary situation, demand should rather be inelastic so as not to lose revenues. Thereby, the choice of elastic or inelastic demand depends on whether alterations in price and income are upward or downward.

Price Elasticity of Demand for Air Travel

The rise of the Internet led to free access to information. Consumers are now able to search for the best offers, thus, being aware of the most advantageous options. Demand for air travel is not an exception to changes in PED values. There are plenty of websites suggesting the lowest prices in the market, discounts, and special promotions. Thus, an increase in prices for air tickets will result in a drop in demand. PED becomes more elastic and sensitive as consumers know that a better deal will be available soon. If the government intervenes and applies a maximum price policy, airline companies would have to reduce prices. Such a limit would boost demand for tickets, raising PED figures and consumer surplus. Thereupon, the online platform made the demand for airfare more elastic.

Reference

Coglianese, J., Davis, L. W., Kilian, L., & Stock., J. H. (2016). Anticipation, tax avoidance, and the price elasticity of gasoline demand. Journal of Applied Econometrics, 32(1), 1-15.

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