Writer's choice: Elasticity of demand (Essay Sample)

Elasticity of Demand Student Name University Name Course Name and Number Instructor Name Date of Submission In any market situation, business managers will increase or reduce the prices of their product as of their interest. Elasticity of demand is one of the quantitative way of measuring consumers' sensitivity or their responsiveness to changes in price (Codes, 2005). Beginning from the present price that a firm charge, elasticity of demand will be measured as the percentage change on the quantity demanded as a result of a percentage change in the price (Forgang & Einolf, 2007). For example, if price is raised by a margin of 10 percent and the quantity that is now demanded decreases by ten percent (the law of demand states the higher the price the lower the quantity demanded and vice versa), the increase in returns realized from the higher price is balanced by decrease in quantity demanded. Total returns for the business will not change, though it is likely that the profits may rise as the firm is now selling a lesser quantity of the product while receiving an equivalent amount of returns. If a price change effects in no change in total earnings, the elasticity of demand is said to be unitary. According to Baumol & Blinder (2009), the change in price of a commodity will influence to a very great extent on the demand for its compliments and substitutes. This implies that, the elasticity of demand also is of great importance when looking at the compliments and substitutes which are also a factor in analyzing the market trends. According to (Travel Agents: Executive Summary-UK-December 2011) at first all the travel agencies maintained their prices constant and moved on as if nothing happened. The report stresses on the decline in the overseas holiday booked from the time when prices of the holidays didn't change as much. Recently, slowdown in the economy has negatively affected the demand for overseas holiday. There is an immense decline in the number of travel agencies across the United Kingdom as per the report. Price elasticity of demand is usually dependent on the inherent nature of the product, availability of compliments, substitutes and the general characteristics of the product. For this particular case, the price elasticity of demand for overseas holiday is elastic. It will be considered as a luxury goods by many since consumers are price sensitive. Any increase in price, drives consumers to some other forms of leisure and entertainment activities such the movies, casinos and shopping trips within the United Kingdom instead. Simultaneously, the travel services that are being offered by the various travel agencies are close substitutes for each other. Consumers are able to search for the service provider who offers the greatest value for their money. This implies that, any small reduction in price offered by any one of the travel agencies, will result to a significant increase in quantity demanded. Unless these travel agencies are in a position to differentiate their products, the consumers will become less sensitive to changes in price. The price elasticity of demand also depends on the peak and off-peak holiday seasons. In the off-peak seasons when the travel services have got more unused capacity, the demand for the travel services are likely not to be affected by reduction of prices. At such a time, massive discounts have to be offered to attract customers. At the peak seasons when all the agencies and hotels are competing for air-tickets the same timeframe, the travel agencies can charge higher prices without the fear that the customers may go away, in this case the demand will be more inelastic. Customer's tastes and preferences also affects the price elasticity of demand. For customers who are used to enjoying at the five-star hotels and travelling in first class, any increase or decrease in price will have little or no impact on their demand for this services. Therefore the demand can be said to be inelastic. However, for most average households, demand tends to be price elastic. For them, they are more interested in a travel package that will offer a reasonable hotel accommodation at an affordable price. In a recession, the demand for inferior products might actually grow depending on the severity of any change in income and also the absolute co-efficient of income elasticity of demand. Recession has been the main effect of decline of overseas holiday and steady or increase in the demand of domestic holidays. In any market, the income elasticity of demand for the various products will vary and the perception of a product will differ among consumers. There is an assumption that when we have a lot money or have a feeling we got much money, we will tend to buy more commodities. This is true in most cases that the more money we got, the more we are likely to buy. When we got lesser money, or incases when the prices rise, we tend to buy less. When this is the case for a certain commodity, we call such a good a normal good. I.e. if you buy more units of a good only when you have a lot of money, such a commodity is a normal good. If the price of a normal good increases, you buy less. Usually, not all goods are normal goods. For example, if an increase in your income may cause you to buy lesser units of a good, such a commodity is called an inferior good. In my previous example, customers would be going for a domestic holiday but upon winning a lottery, they might forego the domestic holiday for overseas holiday so the domestic holiday is regarded as an inferior good in this case. Income and substitution will usually effect change on demand differently among the different types of commodities. In this particular paper, I have been discussing income and substitution effects in a situation where the consumer is required to make a choice between overseas and domestic holiday which are both normal goods. Any increase in the overseas holiday price will lead to a decrease in its consumption and a subsequent increase in consumption of domestic holiday (assuming substitution effect is relatively stronger than the income effect). In a case when overseas is taken to be normal good and domestic as inferior, however, the results is completely different. Let's consider the case at which overseas holiday price goes up then the demand will fall. The substitution effect makes domestic holiday relatively cheaper, so demand will increase and demand for overseas will decrease (Dharmaraj, 2010). The income effect may make the consumer feel poorer and makes the demand for overseas holiday decrease but consumption of domestic holiday increase. It is important to note that, that consumption of an inferior commodity varies inversely with person's income: when you feel you got more money, you buy lesser goods, when you got lesser money, you tend to buy more. Assuming that the overseas holiday is still normal and domestic inferior, and the price of overseas decreases, then the substitution effect will cause higher consumption of overseas and lower consumption of domestic, and the income effect will cause a higher consumption of overseas and lower consumption of domestic. Now that the consumer feels richer, he/she is less inclined to buy the inferior good. Unless the recession improves, there will be continuing decrease in the demand of overseas holiday and increase in demand of domestic holiday. The price of overseas holiday must ...