Air Travel as an Example of an Elastic Good - Essay Example

Air Travel as an example of an elastic good Introduction Elasti is the level of sensitivity that a product bears toprice changes. This sensitivity can be reflected by changes in demand and/or supply. Larger changes in demand and supply after a price movement will, hence, imply high price elasticity. Similarly, the converse will also hold true. The elasticity of a product with respect to demand will be dependent on several factors. These include the proportion of the product’s rice to the income levels of its buyers, the prices of the substitute and complementary goods, and general tastes and preferences (Gillen, Morrison, and Stewart 1).

We shall, hence, carry out an assessment based on past studies of how air travel qualifies as an elastic good with regard to these factors. Closeness of substitute goods It is understood that a change in price for substitute goods can affect the price elasticity in demand of a product. A downward shift in the prices of substitute goods will consequently decrease the demand for a product. This is because the utility gained from the substitute product is equivalent to that of the main product. Conversely, an upward shift in the prices of substitute good will affect the price elasticity in demand of the product in a similar manner.

To measure the elasticity of a product with respect to changes in price from substitute products, we use the cross price elasticity index. The cross price elasticity of demand is the ratio of a percentage change in the product’s demand to a percentage change in its substitute’s price. Cross price elasticity = ?X­d/? Yp (Where ?X­d is the percentage change in demand for the product and ? Yp is the percentage change in price for the substitute.) In air travel, an accurate measure of cross price elasticity can be extracted by comparing the prices of alternative transport methods to a given route.

Another measure that can apply is the prices of alternative destinations of equal distance for the same travel purpose. In this line of thought, we consider two different destinations that both serve as recreation spots for travelers who use a certain airport. A traveler may opt for one of the two touring destinations depending on which one is more affordable. In a study carried out by InterVISTAS Consulting Inc. (29), the price elasticity of route-specific air travel options was found to be approximately -1.

4 and this implied a significant effect of price changes in route-based substitutes for air travel to demand. Furthermore, a study carried out by Gillen, Morrison and Stewart (1) revealed that the price elasticity in demand for air travel reduces as the length of a flight increases. This is clearly due to the lack of available substitutes for a number of long distance travel routes. Proportion of income spent on the good The tendency for people with low income to demand less of air travel with any price increase is apparent.

This is due to the relatively large costs that it presents to most consumers. This is because the proportion that such a cost would represent to their income will be much higher than that of a high-income traveler. The InterVISTAS study (9) confirms that an increase in the travellers’ income results in increased overall demand for air travel. Results from the study showed that the income elasticity for different air travel products ranged between +1 and +2. This once again shows that air travel has a high price elasticity.

In this case, the positive sign demonstrates a positive relation in that an increase in income relates proportionally to an increase in air products purchased. Such income elasticity can be calculated by expressing the percentage change in demand as a ratio of the average percentage increase in income. On a similar note, research findings made by Kenneth J. Button (46) provide similar results. The income elasticity of North Atlantic Travel was rather high at figures extending up to +4.38. Trips from Australia on recreational travel offers settled at approximately 2.1. The study also showed that income changes are more likely to result in a sudden and steep change, in demand.

However, in the long-run, this level of elasticity decreases as consumers adjust to the situation and accept their new income levels hence reviving demand levels. The phenomenon proves the dynamic nature of air travel elasticity with time. Time elapsed since price change The reaction to a price change is initially high for any airline. The disparity usually comes in when different consumers are considered. Business travelers are not affected immensely by price changes because the firm pays for their costs (Brons, Pels, Nijkamp and Rietveld 168).

They thus have less flexibility in deciding how to travel. On the other hand, leisure travelers have more room to make economically sound decisions due to the less pressing nature of their demand. In effect, when a price change is observed, there will be high initial reaction by leisure travelers than it will be amongst business travelers. A sharp decline in demand can be observed once a relatively small percentage upsurge in price takes place. This effect is bound to stabilize after a short period as consumers who can adapt to the new prices are left.

This proportion of consumers will possibly be the high-income consumers who are not greatly affected by the price changes. Works Cited Button, Kenneth. Transport Economics. Cheltenham, UK: Edward Elgar Publishing Inc, 1993. Print. Brons, Martijn, Pels, Eric, Nijkamp, Peter, and Piet Rietveld. “Price elasticities of demand for passenger air travel: a meta-analysis.” Journal of Air Transport Management. 8 (2002): 165 – 175. Web. 15 April. 2012. Gillen, D.W., Morrison, W.G. and C. Stewart.

Air travel demand elasticities: concepts, issues and management. Department of Finance, Government of Canada, 2003. PDF file. Web. 15 April. 2012. InterVISTAS Consulting Inc. 2007. Estimating Air Travel Demand Elasticities. PDF File. Web. 15 April. 2012.