Question

uppose an airline determines it can charge different prices to people traveling for business or emergencies and leisure travelers who travel for pleasure. The airline’s goal is to increase total revenue. The price elasticity of demand for business and emergency air travel is -0.80, and the price elasticity of demand for pleasure air travelers is -1.70. Based on the price elasticity of demand for each group of people, how should the airline adjust its prices?

Answer 1

Price elasticity of demand is a concept that seeks to measure the sensitivity of demand to the price of a good or service. Thus, if demand is elastic, it means that even small variations in price have a strong impact on demand. Conversely, if demand is inelastic, variations in the price of the good will not greatly affect demand, meaning consumers will continue to demand that particular good or service. The calculation of the price elasticity of demand consists in the division between the variation of the quantity demanded by the variation in the price practiced. If the result is greater than 1,in module, demand is considered elastic (price sensitive). Conversely, if elasticity is less than 1,in module, demand is considered inelastic (little price sensitive). If elasticity equals one, then the change in demand is exactly the same as the price change.

In the case described, the demand for business travel is less than 1 in module: | -0.80 | <1, this means that these people demand air tickets even if the price is higher. In this case, the airline may raise the price to increase revenue.

In the case of demand for leisure travel, the elasticity is greater than 1: | -1.70 | > 1, this means that demand for air tickets is price sensitive. Thus, rising prices decrease demand and decreasing prices increase demand. Thus, in this case, the airline must lower ticket prices to increase revenue.