Posted at 04.10.2018
Explain what is meant by the word elasticity and briefly discuss its main determinants. Using diagrams, equations and real life examples make an effort to examine this idea in the air travel industry.
Elasticity is the measure of responsiveness to a share change of an variable to a share change to one of its determinants. Normally, this is the price or the income. There are many different elasticities, this includes price elasticity of demand (PED), price elasticity of source (PES), income elasticity of demand (YED) and mix elasticity of demand (XED).
There are numerous uses for the application of elasticities, this includes government plans such as taxes, where the administration can analyse the consequences a lower or an increase in the various tax' may have. The effect on firms due to changing prices is another situation where elasticities can be applied. Likewise, the result on firms credited to a change in income may also be a use for elasticities. For instance, during the recession thousands of people had to lessen the hours at the job, therefore there is a reduction in their income, how could this have afflicted demand? Elasticities can even be used to analyse future use, for example, strawberries are seasonal therefore demand in the summertime is greater than demand in the wintertime, by using elasticities companies could analyse just how many strawberries would be required to match usage and also be used as helpful information for future assets. These are just a few of the many uses of elasticities.
Price elasticity of demand (PED) is the degree of responsiveness of quantity demanded of an change in price. This is calculated by using the following formula:
PED= Percentage change in number demanded
Percentage change in price
An example of this might be if amount demanded for TV's comes by 10% scheduled to a 2. 5% upsurge in the purchase price then PED= -10/2. 5=-4. As there will be a fall in cost and a rise in number demanded or an increase in cost and a street to redemption in quantity demanded PED will be negative.
There are two types of PED's; they are elastic demand and inelastic demand. Flexible demand is whenever a percentage change in price brings about a more than equal percentage change in amount demanded. This means that a price increase will result in a greater reduction in income and a decrease in price will bring about a more than equivalent gain in income. For the PED to be stretchy, the worthiness of elasticity would be greater than 1. For example if the price of a phone reduced by 10%, triggering demand to increase by 20% then PED= 20/-10=-2. If the PED value is 1, this is called unitary elasticity; this is when number demanded changes by the same percentage as price.
Inelastic demand is whenever a percentage change in price brings about a less than equal percentage change in quantity demanded. This means that a price increase will cause a less than equal percentage decrease in amount demanded, therefore a gain in revenue, in the same way a reduction in price will bring about a significantly less than equal ratio change in variety demanded therefore a damage in earnings. For the PED to be inelastic, the value of elasticity must be between 0 and 1. For example if amount demanded for petrol falls by 4% anticipated to a 10% upsurge in price then PED=-4/10=-0. 4. Normally, this is the truth for oil as the substitutes to oil and its complimentary item; a car isn't as strong as other items. For instance if there is a huge upsurge in the price of a phone, then there are extensive alternatives therefore its stretchy. There are multiple reasons for olive oil to be inelastic, such as a car is a permanent product and it can't work without petrol, therefore despite a rise in prise individuals are obliged to continue using oil. They are able to use substitutes to autos, including the bus, train, bike, walking, etc. However they may be more expensive to operate than a car and will always lack the comfort and sense of personal privacy an automobile has. If the PED value is 0, this is recognized as correctly inelastic, this is when variety demanded remains exactly the same regardless of the change in price. Listed below are flexible and an inelastic diagram.
Price Pe1 Price
Q Qe1 Q1 Qe Qi Q Qi1
Quantity demanded and offered Number demanded and supplied
In the elastic diagram you can see elastic collection (blue) and a properly elastic brand (red). For the flawlessly elastic line you can view that price will usually continue to be the same, whatever the change in demand as shown by Q and Q1. However for the elastic series you can view that when the price raises from Pe to Pe1, there's a huge (more than equal) contraction in number demanded from Qe to Qe1. Inside the inelastic demand diagram you can view the inelastic line (blue) and the perfectly inelastic lines (red). For the perfectly inelastic lines demand will usually stay the same, even if prices are evolved. However for the inelastic series you can see that despite the huge fall in cost from Pi to Pi1, variety demanded has only just a bit shifted (significantly less than similar) from Qi to Qi1.
There a wide range of determinants for PED. The PED may differ to all types for different products and business. Substitutes are one of the primary determinants for PED. A substitute is a good that can be replaced by another good to be able to meet a want. The better the alternative, the higher the PED is inclined be. For example tea has many substitutes, such as caffeine, hot chocolate, energy beverages, etc. therefore the price of tea rises, many consumers would happily move onto alternatives. Alternatively, sugar has very few substitutes, not many products can replace sugars, and hence an increase in cost will have little influence on demand.
Time is another major determinant of PED.
"Between Dec 1973 and June 1974 the price tag on crude olive oil quadrupled, which led to large raises in the price of petrol and central-heating petrol. Over another few months, there is only a very small reduction in the intake of oil products. Demand was highly inelastic. The reason why was that folks still wanted to drive their automobiles and heat their house. " (Sloman & Wride, 2009)
From this we could see that olive oil is incredibly inelastic, therefore despite high prices over long periods of time demand only reduced slightly. The passing then went on saying;
"As time passes, however, as the higher olive oil prices persisted, new fuel-efficient cars were developed and many people switched to smaller automobiles or moved closer to their work. Similarly, people switched to gas or stable fuel central heating, and spent additional money insulating their houses to save lots of on fuel expenses. Demand was thus a lot more elastic in the long run. " (Sloman & Wride, 2009)
As there have been no substitutes to petrol in the car industry, cars were made more efficient and new ways were developed for central home heating, therefore making demand much more elastic over time.
Income elasticity of demand (YED) is the degree of responsiveness of volume demanded of a percentage change in income. This computed utilizing the following method:
YED= Ratio change in variety demanded
Percentage change in income
An exemplory case of this might be seat tickets for football matches, if incomes fall season by 10%, as a result causing volume demanded street to redemption by 20% then YED=-20/-10=2. Once we can easily see by this example, unlike PED, the YED value isn't always negative it can even be positive. A change in income can be induced by changes in wage rates, tax rates, government regulations, etc.
There are three types of YED's they are superior goods, inferior goods and normal goods. Superior goods are when a small percentage increase in income causes a large ratio rise in demand and a tiny percentage decrease in income would lead to a big fall in demand. For the YED to be superior, the worthiness of elasticity would be higher than 1. For example incomes increase by 2. 5% anticipated to a decrease in in tax causes number demanded to increase by 10%, therefore YED=10/2. 5=4.
Inferior goods are when money surge produces a show up in demand for an inferior good once we are able the more expensive and superior alternatives. This does mean that there would be a rise in demand for inferior goods if earnings were to show up. For YED to be substandard the worthiness of elasticity needs to be below 0 (negative). An example of this would be during the tough economy, people used cheaper alternatives therefore of job uncertainties and because of the lower incomes anticipated to having to lessen on hours at the job. Demand for the top superstores; Tesco, Asda, Sainsbury's, etc. fell and demand for low cost chains such as Lidl, Aldi, 99p Stores increased.
Normal goods are when there is a little but positive reaction to high incomes. YED between 0-1 are normal. Food and clothing are usually normal.