Question

Could someone take note for me from this paragraph with explantation . Thank you in advance

-80 PART 1 MICII Analysis a 2006 en less price por search The Influence of Price Elasticity on Managerial Decision Making Price elasticity of demand is an extremely important concept for a firm becs tells managers what will happen to revenues if the price of a product chandelt can also help firms develop a pricing strategy that will maximize their profits The demand for airline travel changed substantially between 1990 and 2 to the following factors. Although business travelers have always been less sensitive than tourists because they have less ability to postpone a trip or for alternatives, they have become more price sensitive due to improvement electronic communications and increased restrictions on travel reimburse Tightened security restrictions at airports have resulted in travelers havi increased preference for direct flights. The option of purchasing tickets on Internet has reduced customer search costs and increased their knowled about alternative fares. It has been estimated that the price elasticity of dem for tourists increased in absolute value from 0.78 to 1.06 and for business to elers from 0.07 to 0.10 over the period 1999 to 2006. The price elasticity 31 percent larger for tourists and 43 percent larger for business travelers. The connection semi-elasticity, or the percentage reduction in quantity demanded a direct night became a connecting flight, increased in absolute value from 0 to 0.75 for business travelers and from 0.75 to 0.80 for tourists. Thus, both bus ness travelers and tourists exhibited a stronger preference for direct flights in 2006."1 The airlines use knowledge about these different elasticities to develop a complex schedule of prices for different groups of travelers and varying types of flights. nowledge Information on the price elasticity of demand for gasoline affects managerial decisions in the automobile industry. In response to a price increase, consumers may travel less by car, either switching to altemative modes of transport or by tray. eling less in general. Consumers may also sell their cars, buy more efficient models ur change the usage of various household models. Thus, changes in stasoline prices affect the quantity demanded of gasoline though fuel efficiency, mileage per car and car ownership. Consumers will typically drive less in the short run and then consider ownership changes in the long run. In an analysis based on data from 43 other studies, researchers estimated a short- rin price elasticity of gasoline demand of -0.34 and a long-run elasticity of -0.84 Consumers have more options to adjust to changes in gasoline prices in the long run than in the short run. The long-run elasticity estimate can be decomposed into estimates of the price elasticities of fuel efficiency (0.31), mileage per car(-0.29) and car ownership (-0.24). Thus, in the long run the response to changes in gaso line prices is driven by a similar size of response in terms of fuel efficiency, mile age per car, and car ownership. These relatively small price elasticities in both the short run and the long run indicate that the use of gasoline taxes to decrease the demand for gasoline may not be a very effective policy." Elasticities are also important for management in the public sector. For example, a manager at a public transit agency needs to know how much decrease in ridershup will result if the agency raises transit fares and the impact of this fare increase of the total revenue the agency receives from its passengers (the amount of mones received by a producer for the sale of its product, calculated as the price per un times the quantity sold). money received by e sale of its prod the price per unit sold. Steven Berry and Paule Jia, "Tracing the Wors An Empirical Analysis of the Airline Industry' Economico Micronomie

Answer 1

The article is about ‘Cross price elasticity of demand’, in this article it is eloquently explained how demand for one good, X, varies with the change in the price of other goods, Y.

The elasticity coefficient is defined as the ratio of the percentage change in demand for Good X and the percentage change in the price of good Y.

Substitute goods are two goods with the positive cross-price elasticity of demand coefficient, an example being coffee and tea, if the price of coffee goes up, people would substitute it with tea and hence the demand for tea would go up.

Complementary goods are two goods that have negative cross-price elasticity of demand coefficient, an example being coffee and cream, if the coffee prices go up, people would consume less coffee and hence the usage of cream would drop.

Elasticity is also impacted by time horizon. In the short term, the goods are inelastic in nature due to lack of substitution. However in the long run the goods are elastic in nature as there is more availability of substitute goods. If goods are inelastic in nature, then a rise in price would lead to rise in the total revenue.

But in case of elastic good, a rise in the level of prices would lead to a fall in the level of total revenue.