Case Study Analysis - Article Example

Running Header: Economics Student’s Name: Instructor’s Name: Course Code: Date of Submission: Economics Price elasticity of demand shows the responsiveness of the quantity of goods and services demanded due to a change in price all determinants of demand being constant such as income. Frank (2008) describes that price elasticity of demand is said to be elastic when the value of price elasticity is greater than one or where the changes of price have a large relative effect on the quantity of goods demanded in the market and inelastic when the effects are relatively small. Price elasticity of demand is also a measure of the sensitivity of quantity demanded in the market according to the changes in price. Inelastic demand is a situation where the demand of a product does is not affected by the changes in price. Some of the products with inelastic demand include necessities, those with few alternatives and those that tend to display inelastic demand for example the demand for salt, milk, water is relatively inelastic since the change in price the demand relatively equivalent while that of sugar, vacation travel and entertainment is elastic since there are many substitutes for sugar and other services (Frank 2008). Telecommunication In telecommunication the relative price elasticity of demand is perfectly elastic for example the reduction of telecommunication charges to increase the total demand of subscribers. In order to recover huge sunk costs, operators of telecommunications use the inverse elasticity pricing. This involves setting higher prices for the services with least elastic demand. The inverse elasticity rule is used by telecommunication services in order to reduce monopoly pricing and maximising losses. Use of inverse elasticity applies a myopic application and therefore telecommunications adopt the rule at face value (Robert 2005). A telecommunication bundling report shows that about 35 percent of customers are more likely to buy bundles services from an electric provider. Telecommunications industry use peak and off peak pricing where the price charged varies with time for example there may be three rates for telephone calls such as daytime peak rate, off peak evening rate and at weekends some telecommunications providers make it cheaper. These changes in prices are effective as customers find themselves calling for long hours during peak hours and this shows that the lower the price the higher the quantity demanded. During off-peak hours telecommunication companies have plenty of spare power and the marginal costs of productions are low. On the other hand, at peak hours the demand is high and this brings about a relatively inelastic short run supply. This is because the suppliers reach capacity constraints. Gillespie (2007) shows the high demand and the rise in costs increase the profit maximization price. There are three major drivers in the telecommunication industry which include macroeconomic growth. The increase in nominal GDP leads to an increase in nominal telephone revenues. This is because telephone intensity is constant. The other driving factor is telephone intensity which is the secular growth in the use of telephone in an economy. The final factor that drives demand of telecommunication is price elasticity which measures the price-volume relationship. A recent survey also showed that the demand of cellular services increases as a result of decline in prices of handsets, activation fees and deposits given by subscribers. The price elasticity of demand a fall of price of handsets by 10 percent results to 20 percent increase in demand of telephone services (Gillespie 2007). Hospitals Price elasticity shows that when prices change by a small percentage, the purchases are not much sensitive and the demand is the service is price inelastic. However, when quantity changes by a large percentage more than the change in price, the purchases become more price sensitive and in this case the demand id price elastic. Companies should therefore lower their prices once demand becomes more prices sensitive. The factors that determine the price elasticity of demand include availability of more substitutes and the more they are the higher the price elasticity of demand. According to Leo (2011) the other determinant is how important the services is and according to the consumers income, if the importance is more then price elasticity of demand is more. Time lapse also determines price elasticity and if there it has taken more time to shift the price then price elasticity will be higher. In hospitals, different prices are charged to different payers according to different price elasticity. The price elasticity of demand for medical care is relatively low. However, some types of care are more prices sensitive for example preventive care offered in hospitals and pharmacy has large price elasticity. This is because the demand for preventive care is more prices sensitive and there are various goods and services that could serve as substitutes. In this case, when the price of care increases, customers may use other substitutes for example use of nutritional supplements or healthy foods in order to avoid diseases. Since preventive care is seen more of a luxury than a necessity, it may be avoided once the price of the care increases. The effective price that customers pay in hospitals depends on various factors such as the price of service offered, coinsurance, premiums and other expenditures. Leo (2011) describes that the quantity of health care is also measured in various ways for example through the number of doctors’ visits and medical expenditures. It is therefore estimated that the price elasticity of demand is negative 0.5 showing the demand for visiting a hospital for health care is relatively inelastic. Airline Airlines have for a long time tried to balance passenger-load factors that determine the prices to be charged. The price depends on the class of the plane for example leisure travelers have more price elasticity that those travelling at the front of the plane which is highly inelastic. The first class part has low price elasticity to demand unlike the back which has high price elasticity. This is because more customers demand the first class where the price is high during good economic times. To analyze the demand for air travel, it is necessary to distinguish among business and leisure travel, long and short travel, international and local travels (Robert 2005). Consequently, to analyze the sensitivity of demand for airlines and the price they charge, it is important to separate estimates of own-price elasticity of demand which are used in different markets. The demand for air travel is less elastic for longer distances than for shorter ones. International travel also becomes less sensitive to changes in travel prices since the change is a small percentage to the total trip cost. Leisure travelers on the other hand are more sensitive to the increase in airline prices and may postpone their trip till the fare is affordable and therefore demand in more elastic than business purpose trip. Geoff (2006) explains that where there are few substitutes, the price is inelastic and if there is fierce price competition among airlines to the USA, the price is elastic. Airlines use price discrimination for example through easy bird discounts where customers who book early pay lower prices than the rest who find a rise in price. In this case, the customers demand for a flight is inelastic when the time of service is near. Airlines also use peak and off-peak pricing where demand rises during peak hours forcing the demand to be relatively inelastic. Cross- price elasticity Cross- price elasticity measures the responsiveness of the consumption of one commodity when the price of another changes. It is the percentage change in quantity demanded of commodity A given the change in price of commodity B showing that the two commodities complements each other. Cross-price elasticity is described in two categories which include complements and substitutes. Complements include two goods with a negative value of cross-price elasticity therefore considered as complementary goods. In the case above, in telecommunication, the price of cell phones and the price charges for calling complements each other. This is because an increase in prices for calling rates poses a change in the quantity demanded for cell phones. This shows that there is a negative relationship between the two commodities. Conversely, if the prices of calling rates fall which is a negative coefficient, there quantity demanded for cell phones rises as it is a positive coefficient (Leo 2011). Substitutes are goods with a positive value for cross-price elasticity. A substitute good is one that can be used in place of another for example margarine and butter are substitutes as the demand for both prices is bound together as customers may choose to buy one product for the expense of another for example due to increase in price or the decrease in price of another. A good is a perfect substitute if it can be used exactly the same way as the other for example in the case above in telecommunications such as telephones, telegraph may be well substituted by the use of internet and so if the prices of telephone calls and telegraph increases, consumers substitute by use of internet. In the airline industry, the cross-price elasticity of demand is very high. This is because if one Airline initiates fewer prices, then the competitors also lower their prices in order to keep the market share (Geoff 2006). References Frank, R 2008, Microeconomics and behavior, 7th ed. McGraw-Hill. Geoff, R 2006, Price discrimination, Etona College, viewed 28 June 2011, Gillespie, A 2007, Foundations of economics, Oxford University Press. Leo, L 2011, Marketing, viewed 28 June, 2011, Robert, L 2005, On labor demand and equilibrium of the firm, Manchester School, 612-619. Read More