Question

Discuss in the context of the income elasticity of demand for air travel, the effect on the revenue of airlines given that there is a large decrease in the income of consumers. Does your answer depend on the price elasticity of demand for air travel? Explain using a suitable air travel market diagram.

Answer 1

Elasticity of demand is calculated as %change in quantity demanded / %change in price

If %change in quantity demanded > %change in price, demand is elastic. There is elastic demand of airline industry because it is consumed as a luxury or non-necessary good because people often use it for trips, vacations, travel which can be reduced in hard times when income level falls. Due to fall in Income, consumers demand less of air travel which reduces total revenue of travel industry.

You can see in the graph below that area of portion P₁AQ₁O (total expenditure when deman reduced) is less than area of portion P₂BQ₂O (total expenditure before decrese in income).

frut Supply Bi B Demand dz O quantity