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Amanda Quinn, Royal Grammar School, Guildford and Bob Campion, a finance journalist, illustrate key concepts in microeconomics in a case study of the air transport industry.
Summary of Key Points
* Elasticity of demand is how demand for a product changes when one of its determinants, such as price, income or competitor activity, changes.
* Air travel as a whole is relatively price elastic, but this varies between segments; e.g., business travel is more inelastic than leisure travel.
* Price elasticity of demand allows firms to maximise total revenue or capacity utilisation. Knowledge of PED of different market segments allows firms to price discriminate, that is charge different prices to different groups of customers.
* Income elasticity of demand allows firms to make more accurate forecasts about future demand due to fluctuations in the business cycle and long-term increases in income.
* Cross elasticity of demand allows firms to predict the effect of changes in the price of related goods; either complements such as hotel accommodation or substitutes such as other modes of transport.
PDF format: 4 A4 pages. First published in Economics Today magazine November 2004.
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