Question

Evaluate the demand characteristics of airline tickets. Look at demand elasticities and competing product characteristics. Please cite sources, thank you!

Answer 1

Elasticity is a responsiveness to change in particular input. If it is price then price elasticity of demand (Ped) means the degree of responsiveness of demand to a change in price which is given by formula:

Ped= %change in quantity demanded/ % change in price. Generally with increase in price, demand goes down. If airline become expensive then demanded quantity is less.

It is clear that air travel is a luxury product.It is expected to have higher elasticty of demand with value for than 1. However, among existing customers demand is relatively inelastic. This happens due to limited time reducing options for quick travel. more companies entering also reduces pricing for customers.

Airline companies use this inelasticty of demand and offer prices that differ with booking timings. Eralier the booking, lesser the cost. Companies get more money for a longer time and cash at hand increases for them. Customers also build loyalty with air travel then as consumer surplus increases due to lessened costs.