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Elasticity Of Demand And Economics Decision Making Economics Essay

Extent or grade to which a demand or supply curve reacts to the alteration in monetary value is called snap of that curve. This nature of curve varies with different nature of merchandises means if a merchandise is indispensable so alteration in monetary value does non consequence much on demand. On the other manus less indispensable merchandise are rather sensitive to the monetary value alterations because chance cost of purchasing those merchandise go excessively high.

A good or service is said to be extremely elastic if little alteration in monetary value leads to a crisp alterations in measure demanded or supplied. There are tonss of merchandises in the market which are non needed in our everyday life. And a good or service is said to be extremely inelastic if alterations in monetary value does n’t consequence much on the measure demanded or supplied. These are those merchandise or services which are really much necessity to our day-to-day life.

Price Elasticity of Demand

It is defined as the per centum alteration in measure demanded to the per centum alteration in monetary value for a peculiar merchandise or service. Demand is said to be elastic if alteration in monetary value leads to a higher alteration in demand, in that instance Price Elasticity of Demand ( PED ) would be more than one i.e PED & gt ; 1




Elastic demand PED & gt ; 1 Q Perfectly Elastic Q

Goods which comes under elastic class tend to hold following features

They are luxury goods.

They are really expensive like athleticss autos.

Goods bought often.

Goods with many replacements in market.

Price Inelasticity of Demand:

Demand is said to be inelastic if the per centum alteration in monetary value does n’t impact much on the demand of a merchandise i.e. PED & lt ; 1


Inelastic demand PED & lt ; 1 Q Perfectly inelastic PED=0 Q

Goods which come under inelastic class tend to hold following features:

They are necessities.

Peoples are use to them means they are addictives like vino & A ; coffin nails.

They have no or really few replacements like gasoline.

They cost a little per centum of income and bought infrequently.

In the short demand is normally more inelastic because it takes clip to happen options. We can state if the monetary value of cocoa increased demand would be inelastic as there is no options, nevertheless if the monetary value of quicksilver increased there are close replacements in the signifier of other cocoas. Therefore demand would be more elastic.

In wide there are three factors act uponing the demand ‘s monetary value snap:

The handiness of replacements: This is the most of import factor act uponing the snap of a good or service. In general speech production more the substitutes the more elastic the demand will be.

Income available to pass on goods: This factor impacting demand snap refers to the sum a individual can pass on a peculiar good or service. Now suppose monetary value of orange juice goes up from $ 2 to $ 3 and the income remains the same. So the income that is available to pass on orange juice which is say $ 12 is adequate for merely 4 tins instead than 6. In other words consumer is forced to cut down his demand of orangish juice. So if there is addition in monetary value and at the same clip no addition in available sum for that good or service so there will be elastic reaction in demand. Therefore demand will be sensitive to a alteration in monetary value if there is no alteration in income.

Time: Another of import factor is clip. If monetary value of coffin nails goes up by 15 % , a tobacco user with really few utility start purchasing on day-to-day footing alternatively of purchasing for a hebdomad or so. This suggests that baccy is inelastic because alteration of monetary value will non hold a considerable influence on the measure demanded. However if the tobacco user finds hard to pass excess 15 % and begins to acquire rid off smoke, the monetary value snap of coffin nails for that consumer go elastic in long tally.

Market Structure:

Every market has his ain characteristics on which it works or behaves. There are few characteristics which we should see while finding the market construction as

First of all we should cognize the consciousness of consumer about the market. We should cognize how knowing our clients are.

We should cognize how many houses are making the same concern ; it tells us the extent of competition we are supposed to face.

What type of merchandise we are covering with, whether it is coming in the class of necessary merchandise or in the class of luxury merchandise.

Whether the entry in the market is easy or hard and same is the instance with go forthing the market.

Based upon these factors we decide whether the market is absolutely competitory or amiss competitory. In a absolutely competitory market there is no entry and issue barrier, we can come in or go out at any point of clip from the market. Besides in absolutely competitory market merchandise is homogeneous and there are big figure of purchasers and Sellerss. While in amiss competitory market there are really few purchasers and Sellerss, really hard to come in into and go out the market and at the same clip there is monopoly of merchandise.

Market Structure of Airline Industry:

Market construction which suits to Airline Industry is oligopoly market. In this type of market there are merely 2-3 houses who dominate the market. Advertisement and selling is really of import in such type of markets. As there are really few houses, they know each other really good. They know schemes of each other. So they ever consider their rivals, while doing monetary value schemes, because they merely ca n’t put the monetary values by themselves. They have to see the pricing of their rivals as good. Although when one house has a dominant place in the market the oligopoly may see a monetary value leading. Firm holding lower market portion may coerce to follow the pricing policy of dominant house. As big sum of fixed cost is involved in this type of market so entry every bit good as issue is really hard. There are fundamentally three major theories about the oligopoly of pricing as under:

These houses collaborate to bear down the alone monetary value and at the same clip alone net income.

These houses compete on monetary value so that monetary value every bit good as the net income will stay same as in competitory market.

These houses had the monetary value and net income in between of absolutely competitory and monopoly markets.

Market Structure

Seller Entry


Buyer entry


Number of


Number of


Perfect competition








Very few





Merely one


Table for different market construction

Output Management:

The basic construct of output direction is to supply right service to compensate individual at the right monetary value on right clip. ( Kimes, 1989: Weatherford and Bodily 1992 ) . Now in instance of Airline Industry we can specify yield direction as bring forthing maximal gross per place by maintaining client satisfied. We can make this by using different policies. As in every industry, client is really of import in this industry. Customer is paying rather an sum to acquire the services of this type of industry. So we have to take a really good attention of client as good. We have to supply good service right from the engagement of ticket to go forthing off the plane.

The strategic points of output direction are four C ‘s viz. , calendar, capacity, clock and cost and they all bound together with another C i.e. client.

Singapore Airlines is a great illustration of this. They take a great attention of their clients. They keep informations of each and every rider travel with them. They non merely supply first-class service but besides maintain good and caring dealingss with clients.

Firms compete for market portion and demand from clients in many ways. We differentiate these ways into two major subheads i.e. Price Competition and Non-price Competition. We are sing New Zealand Airline Industry as an illustration

Monetary value Competition:

Price competition involves increasing the demand by discounted the monetary value. We increase our concern in different ways as under:

We can supply discounted tickets in the off seasons. We can supply ticket through some strategy like purchase one ticket and acquire 50 % price reduction on purchase of another ticket. This would decidedly pull clients and at the same clip would increase the gross. Because there is no usage of winging with vacant place, its better to hold clients with discounted tickets.

We can besides get down pre booking strategy particularly for our off season. We can establish strategy like price reduction on ticket booked 1-2 months before. This would enable us to cognize how much client we have in our off season and we can do our farther scheme harmonizing to that. If we still have really few engagements so we can offer some gifts, holiday bundle or so on booking to din our sale. We can present new bundles with our tickets. We can join forces with few hotels to supply a complete vacation ‘s bundle to household, freshly married twosomes & A ; adolescents.

We can supply one manner free travel, means a individual can pay for one manner and acquire the ticket for return every bit good. This will increase the gross and at the same clip enable us to acquire few loyal clients.

Non- Price Competition:

This is the focal point on other schemes to increase the market portion. There are assorted schemes which comes under this class as

Ad and selling is the major scheme which comes under this class. As there is immense investing involve in this type of industry so we want to acquire ace normal net income out of this. Advertisement plays an of import function in accomplishing this. We advertise and market our merchandise or service in such a manner that it put important impact on client.

On line engagement is another value added service. We can book our ticket from place and acquire our place confirmed. This would assist client to do his program good in progress and at the same clip it is hassle free. This would enable them to acquire rid off agents every bit good as long waiting line. And apart from this it is 24 hours service.

Locality card or points given to every client, who keeps on adding and client, will acquire a award on making certain points. This enable client to involvement for his following trip from same air hose.

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