External forces that changes in income levels
Course:- Business Management
Reference No.:- EM131357449

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Read and answer each posst in a casual manner with a min of 200 words each APA references

1-Elasticity of demand can be defined as external forces that changes in income levels, or the price of related goods and services; the external forces brings a change in demand. When these other factors bring a change in demand; the demand of the product or service is defined as elastics. If the factors are not able to bring a change in demand then we classify it as inelastic.

The law of demand is a qualitative statement that tells us the quality of the behavior of demand to the price. The law of demand does not tell us how much the demand will change. With the elasticity of demand we know how much the demand will change and we can quantify the change in demand. The elasticity of demand is a quantitative statement because it gives you the degree of change in the demand.

The costs that are associated with demand elasticity on a single user's transportation cost can include: Air-fare price, competitive airline, consumer income, consumer's preference, and consumer's expectation. Air-fare price is a general determinant for demand of elasticity for air transportation. When air-fare increases consumers are less likely to travel or they would find another substitute such as another mode of transportation or find another competitive airline. The consumers income is also a factor too, a major study commissioned by the International Air Transport Association (IATA) concluded that demand for airline services is generally both price and income elastic (InterVISTAS, 2007). Consumer preference can be describes as one loyalty to specific airline. Customer expectation is categorized as the amount of time for the entire trip, number of connecting flight to destination, frequency of flight, quality of service, and safety.

A model to represent total traveling costs is the differential pricing model. Differential pricing presents a trade-off to customers between inconvenience and price levels. Differential pricing is the strategy of a company sells the same product to different customers at different prices. This can be considered as a pricing behavior at an auction. For example, thirty days before a flight is scheduled to operate the remaining seats will be price differently until all seats are sold. The first seat out of the remaining will be priced at a low fare and next seat will go up in price. Every seat will cost a different price until the last seat goes up in the highest price.

When choosing an airline, I chose a flight that can go towards my frequent flyer miles or travel points. What are some factors that helps you choose a specific airline or a flight?


InterVISTAS (2007), Estimating Air Travel Demand Elasticities, International Air Transport Association

2- Elasticity values in economic analysis are used to indicate the sensitivity of one variable to another, given some pre-specified functional relationship, through a units-free measure. . In economics, consumer choice theory starts with axioms of preferences over goods that translate into utility values. These utility functions define choices that generate demand functions from which price elasticity values can be derived. The elasticity concept termed "own-price" elasticity is the most commonly used (Canada, Department of Finance, 2008).

Own-price elasticity of demand measures the percentage change in the quantity demanded of a good (or service) resulting from a given percentage change in the good's own-price, holding all other independent variables (income, prices of related goods etc.) fixed. In other words, it is measuring the degree to which a variable of interest will change (passenger traffic) as some policy or strategic variable changes (total fare including any added fees or taxes) (Canada, Department of Finance, 2008).

In calculating the price of travel there are several costs that factor in. These costs, according to Sinha & Labi (2007), can be lumped into three areas travel-time costs, vehicle operating costs and safety costs. Travel-time costs are those costs associated with the time spent in transit and is calculated by tabulating the time spent actually in transit vs the time spent waiting such as time spent in the terminal before boarding or time spent sitting in the plane on the tarmac awaiting take-off. Vehicle operating costs consist of costs such as fuel, maintenance and storage costs. Safety costs include preemptive measures such as safety features built into the aircraft and insurance premiums paid to minimize after the fact costs such as injury, damage to vehicles or facilities, etc.

The problem with price elasticity calculations is that as stated earlier they treat many variables as constant. However when estimating demand systems over time, one can expect that some important shift variables will not be constant. To truly understand changes in demand it is important that these shift variables are recognized and incorporated into the analysis, as they will affect the value of elasticity estimates. In particular changes in real income and the prices of substitutes or complements will affect demand. In air travel demand estimations, income and prices of other relevant goods should be included in the estimation equation. Alternative transportation modes (road and rail) are important variables for short-haul flights, while income effects should be measured for both short and long-haul (Mark & Pearce, 2008).

Other factors that can affect the demand elasticity are those of preference due to benefits such as reward points, business travelers that must use specified airlines due to policies driven by price agreements, limitations on carriers serving the destination and so on. This multitude of variables would need to be represented in any model used to determine the demand elasticity for air travel would thus involve an extremely complex mathematical formula.


Canada, Department of Finance. (2008, October 6). Air travel demand elasticitis: concept, issues and measurments. Retrieved from Canada.ca: http://www.fin.gc.ca/consultresp/airtravel/airtravStdy_1-eng.asp

Mark, S., & Pearce, B. (2008, April). Air travel demand. Retrieved from IATA.org: http://www.iata.org/publications/economic-briefings/air_travel_demand.pdf

Sinha, K. C., & Labi, S. (2007). Transportation decision making. Hoboken: Wiley & Sons.

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