Apart from considering how changes in price is affected by the changes in demand and supply, it is also important to take into account the responsiveness to the change in price, income and other goods. Thus, this essay aims to discuss the relevance of the various elasticities of the changes in demand and supply and the limitations of the concept.
Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. The demand for a good is said to be price elastic if a given percentage change in its prices causes a more than proportionate change in its quantity demanded, ceteris paribus. Conversely, the demand for a good is said to be price inelastic if a given percentage change in its price results in a less than proportionate change in its quantity demanded, ceteris paribus.
[Insert a diagram with both elastic and inelastic demand curves]
As shown, the steeper the demand curve, the more price inelastic. A fall in price will result in a more than proportionate increase in quantity demanded for good that is price elastic. Conversely, given the same decrease, it will result in a less than proportionate increase in quantity demanded for a good that is price inelastic.
Secondly, income elasticity of demand measures the responsiveness of the demand for a good to a change in income, ceteris paribus. Positive income elasticity of demand refers to the increase in demand for good when income increases. Such goods are known as normal goods. Normal goods can be sub-divided to normal-necessity and normal-luxury good. A normal-necessity good is income inelastic, which means that a rise in income will result in a less than proportionate change in demand whereas a normal-luxury good is income elastic, which means that a rise in income will result in a more than proportionate change in demand.
Negative income elasticity of demand refers to the decrease in demand for good when income increases. Such goods are known as inferior goods. Inferior goods occur because rising income levels cause consumers to switch from lower quality product to a higher quality product as they are able to afford better alternatives.
Cross elasticity of demand measures the responsiveness of demand for a good to a change in price of another good, ceteris paribus. Positive cross elasticity of demand means the demand for a good and the price of another good change in the same direction. This suggests that the goods could be substitutes. Negative cross elasticity of demand means that the demand of a good and the price of another good changes in the opposite direction. This suggests that the goods could be complements.
Price elasticity of supply measures the responsiveness of quantity supplied of a good to a change in its price, ceteris paribus. The supply of a good is price elastic if a given percentage change in its price causes a more than proportionate change in its quantity supplied. Conversely, the supply of a good is said to be inelastic if a give percentage change results in a less than proportionate change in its quantity supplied.
[Insert a diagram with both supply elastic and inelastic curves]
As shown, the steeper the supply curve, the more price inelastic. A fall in price will result in a more than proportionate decrease in quantity supplied for a good that is price elastic. Conversely, given the same decrease, a price inelastic good will show a less than proportionate decrease in quantity supplied.
In the context of price elasticity of demand, the elasticity of air travel can be analysed using the factors that affect price elasticity of demand, such as availability of substitutes, degree of necessity and proportion of income.
Firstly, the greater the availability of substitutes and the more homogenous the good is, the higher the price elasticity of demand. In terms of air travel, there is no close substitute that is as efficient and as fast as the plane when travelling long distances. In order to travel across the latitudes, there is almost no close substitute for air travel. Hence, air travel can be considered price inelastic of demand. However, some may argue that in the case of short distance travelling, there are substitutes such as trains, cars and public transports that may be as efficient on a well-developed transport network system. Hence, the degree of substitution may differ and is subjective.
Secondly, the higher the degree of necessity, the lower the price elasticity of demand. Since air travel is usually for leisure and relaxation, the degree of necessity may be low for most households that go on a vacation for leisure. Hence air travel can be considered as price elastic of demand. However, the degree of necessity is debatable especially in the case of businessmen as air travel may be a necessity in order to improve sales or make profits. Thus, in this case, air travel is price inelastic of demand.
Thirdly, the larger the proportion of income spent, the more price elastic. Air travel is usually costly, especially when it is long distance or for longer period of time. Hence, it is price elastic.
In the context of income elasticity of demand, air travel is considered normal luxury good for most households hence it is considered income inelastic. However, some may consider air travel as a normal necessity especially when business travelling is concerned. Thus, whether a normal good is a necessity (income inelastic) or is it a luxury (income elastic) depends on individual.
In the context of price elasticity of supply, it can be explained via a long run and short run concept. In the short run, air tickets are booked in advance and cannot be cancelled immediately, supply is fixed, and hence supply is less elastic. However, in the long run, people’s fear of flying may cause a decrease in supply since demand is extremely low. Hence, supply becomes more elastic.
However, there are limitations of applying the demand elasticity concept. In this situation, the fear of flying cannot be measured by elasticity as the changes in tastes and preferences are un-quantifiable. Thus, the impact is not taken into consideration causing the fall in demand to be less than expected, especially in the long run. In addition the cross elasticity is inapplicable as there is no close substitute. The various elasticities are also derived from past data that may be outdated and hence inapplicable for current economic situation.
In conclusion, responsiveness towards changes in price increase is not constant due to the changing economic situation and in reality, several other factors are also able to influence the elasticity instead of being ceteris paribus. Thus, the effect on the airline industry can be only explained to a certain extent.
JC Economics Essays – H2 A levels – Economics tutor’s comments: This economics paper seeks to address the adapted examination question on elasticities and their relevance, to a specific context. This paper develops the arguments and ideas around the economics question, which is good - always answer the question posed. As it is a part (b) question adapted from an A level Economics question, there was an earlier part (a) to it which dealt with explaining the various elasticity concepts on offer. As an assignment or a training exercise, perhaps think to yourself or check out the various definitions - definitions (as well as mathematical equations) for the various types of elasticities: PED, YED, XED (or CED), and PES. What good points are there to praise about this economics paper? A thesis, anti thesis, and synthesis approach to the essay is clearly and obviously used, which should please practically all Economics tutors and examiners when they are marking. It might be a very good idea to make examiners happy when grading papers. However, there are a few simple problems with this economics essay. First, the conclusion is a bit too concise and does not push the envelope, and certainly could be improved upon. How could you help this candidate improve on her conclusion, by writing it better? Also, what other aspects of this essay could be improved upon - what have you noticed is missing from this essay that could have been written in? Think about it. Special thanks to the kind, valuable, and beautiful contributions of AG and other students for this economics blog.
