Question

Explain how the concept of price elasticity of demand applies to hospitality operations. (minimum of 300 words)

Answer 1

the price elasticity of demand (PED) can be used to measure consumer sensitivity to price. In other words, all else equal, PED shows us how elastic (responsive) consumer demand is for a product or service given a change in price for that product or service.

Price Elasticity of Demand Formula

Calculating PED is pretty simple. All you need to know is that:

PED = Q / P

Where:

Q = % change in quantity demanded

P = % change in price

Let's do a quick example. Let's say that you increase the price of your laptop by 10%. This causes the demand to fall by 20%. Thus:

PED = Q / P = 20 / 10 = 2

Generally, a PED of >1 refers to a relatively elastic response, or elastic demand, while a PED of <1 refers to a relatively inelastic response, or inelastic demand. In other words, if the PED >1, then the market is price sensitive, as was the case in this example. A PED of 1 indicates unitary elasticity. That means that a change in price leads to an equal change in demand.

For the hospitality industry, pricing elasticity is defined by how the demand for a hotel room changes in response to pricing. For example, if a hotel drops its rates by a percentage and sees a resulting increase in revenue, that demand is considered elastic. Conversely, inelastic demand is not price sensitive. Factors that affect price elasticity include competitor room availability, degree of necessity, income of buyer, stay pattern and day of week, seasonality, “sale” pricing and the price/value perception.