Unit 4: Exercise 4-2 - Elasticity and Revenue

American Testing 'Elasticity' of Business Fares

Source: http://proquest.umi.com.libresources1.sait.ab.ca/pqdweb?index=7&did=245015231&SrchMode=1&sid=3&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1315070488&clientId=5337

This article discusses the relationship between flight prices, and a business travelers willingness to fly based on flight prices. Since the recession, previously perceived inelastic business travelers and becoming more characteristic of leisure travelers in that flight prices are a major determinant in whether or not they fly.

American airlines tested this theory by lowering last minute fares on flights; the yields were surprising since it was always assumed that business travel was inelastic.

The following graph depicts the increase in revenue as American dropped their flight prices by 40%:

Some of the basic rules of elasticity are as follows: 

• When the average revenue (demand) curve is elastic, marginal revenue is positive and total revenue is increasing.
• When the average revenue (demand) curve is inelastic, marginal revenue is negative and total revenue is decreasing.
• When average revenue (demand) curve is unit elastic, marginal revenue is zero and total revenue is not changing (Amosweb)