Analyzing elasticity of demand simulation

Elasticity of Demand

Select a good or service produced by an organization you are familiar with. Is the price elasticity of demand for this product price elastic or price inelastic? Based on this determination what would be the impact of raising the price of the product? What would be the impact of lowering the price of the product?

The airline industry is characterized by very complex pricing dynamics, depending on travel distance, type of traveler, and domestic and international flights, to name a few of the many factors that determine the degree of price elasticity or inelasticity (Air travel demand elasticities: Concepts, issues and measurement). For long-haul international business travel, demand is not sensitive to fare changes because there are few close substitutes. On the other hand, long-haul domestic business travelers have much higher elasticities than international business travelers. Telecommunications has become more acceptable as a substitute in domestic markets due to common culture, laws, contracts, etc. Likewise, international leisure travelers have greater elasticity than do international business travelers. These consumers are more likely to either postpone their trips in response to higher fares or seek locations that are not as expensive.

Not surprisingly, the elasticity for short/medium-haul leisure is the highest of all travel types. For this segment, alternative forms of transportation such as car, rail or bus are the most common substitutes along with not traveling at all. In contrast, elasticity for short/medium-haul business travel is moderately inelastic, being even less than the long-haul domestic business elasticity. Short/medium-haul business travelers are willing to pay higher fares to save time. Further, there are numerous short haul-trips that arise in the course of business dealings, trips that are not easily planned and that can be completed in a morning or afternoon.

2) Using the same good or service selected in question 1, determine substitutes and compliments, and answer the following questions: a) What has happened to the price of the substitutes and complimentary goods/services for your selected product over the last year? b) How have the price adjustments impacted the demand for the selected product?

The price of traveling by car, rail and bus prices have all increased due to soaring fuel costs over the past six years. Meanwhile, technology for remote conferencing has improved, prices have fallen and user comfort has increased. More and more, companies are taking advantage of conferencing technologies to cut travel costs and increase worker productivity because a worker doesn't have to miss days of work to attend a meeting. Add to this the hassle of tightened airport security, threats of disease outbreaks such as SARS, and increased risk of terrorism, and conferencing has become a booming market.