Question

By considering the determinants of the price elasticity of demand, explain whether the demand for air travel is price elastic or price inelastic. You may consider both the business travelers and the leisure travelers when analysing their price elasticities of demand.

Answer 1

Elasticity of demand for airtravel can be defined as the responsiveness in quantity demanded to a change in price of air travel. It's found by dividing the percentage change in quantity demanded (percentage change in number of people who goes for air travel) with the percentage change in price of air travel ( usually indicated by airline ticket prices.) . There are different determinants of elasticity of demand. Let's find out whether airtravel is elastic or inelastic by analysing the determinants of elasticity of demand for airtravel with respect to business travellers and leisure travellers.

* Necessities versus luxuries or nature of the product

Necessities tend to have an inelastic demand where as luxuries tend to have an elastic demand. For business travellers, airline travel is a necessity. For leisure travelers, air line travel is a luxury.

* Availability of close substitutes.

Goods with close substitutes tend to have more elastic demand as it's easier for the consumers to switch from that good to others. Airline travel doesn't have very close substitutes. However, leisure travelers can go for ship or cruise if prices go very high . On the other hand, business travellers usually don't go for other means of travel.

* Proportion of income

Demand for a product tends to be elastic, if the proportion of income spent is large. On the other hand, it's inelastic if the proportion of income spent is small. Business travellers are usually rich, they can afford airline travel very well. On the other hand, leisure travelers may be spending a large proportion of their income on airline travel.

* Time

The longer the period of time, higher the price elasticity of demand for a commodity. As far as leisure travelers are concerned, time horizon is not much of an importance to them. On the other hand, time is a way precious for business travellers as any delay may have disastrous effects on business deals and transactions.

Based on the above analysis, we can come to a conclusion that, demand for airline travel is elastic for leisure travelers and in elastic for business travellers.

Thus, price change of airtravel won't affect the demand for air travel by business travellers but the demand for air travel by leisure travelers will be affected.