PRICE ELASTICITY

“Have U.S. Drivers Reached Filling Point of No Return?” by Justin Lahart

&
“Airlines Try Business-Fare Cuts, Find They Don’t Lose Revenue” by Scott McCartney

While price is the strongest factor affecting demand, there are several factors that heavily
influence the price elasticity of demand. Inelastic products are much less resistant to affects
from price increases, allowing managers the flexibility to raise prices with little to no concern for
losing sales. On the contrary, elastic products are highly vulnerable to and influenced by
fluctuations in price. The elasticity of a product can change over time, affecting firms and
industries that utilize that product. “Have U.S. Drivers Reached Filling Point of No Return?” by
Justin Lahart and “Airlines Try Business-Fare Cuts, Find They Don’t Lose Revenue” by Scott
McCartney discuss the affects of changing elasticity in gasoline and airplane tickets,
respectively. The articles highlight the number of substitute goods, the percentage of a
consumer’s budget spent on a product, and the time period that the product is under construction
as strong influences on the price elasticity of gas and airplane ticket prices.

The price of gasoline has begun to show a shift from heavily inelastic to more elastic in
recent history. Our textbook, Economics for Managers, discusses the affects of the inelasticity of
gasoline prices that was present in the mid 2000s. The book points to higher incomes within a
sustainable economy and a perception that the spike in gas prices was short-term to explain why
consumers did not generally alter their spending habits as gas prices increased. As noted by
Justin Lahart in his article, we have seen a change in gas’s elasticity in recent years as income
levels have steadily declined and consumers are beginning to believe that higher gas prices are
going to remain for an extended period. Though in the past consumers would not generally
consider alternatives due to higher prices, they are now starting to look to possible substitutions.
This new trend of a more elastic view of gas prices is especially relevant to the automobile
industry, which must now look to the production of smaller, more fuel-efficient cars to continue
sales.
 The airline industry has also seen a shift in the elasticity of products, particularly that of
business passengers. Scott McCartney’s article notes the historic inelasticity of business
passenger tickets, as income levels were high and there was less room for substitution with most
popular routes full of passengers. In the past, business travelers also did not have many options
to choose from when booking flights and they were often traveling last minute. However, as the
economy has waned in recent years, corporations have begun to tighten their budgets, sparking a
trend toward a more elastic passenger ticket for business travelers. With the explosive growth of
the internet ticket availability and discount airlines, corporations now have the greater options
when needing to book last minute tickets. Business travelers are also beginning to explore the
availability of other substitutions, such as traveling by car and teleconferencing. In light of this
changing elasticity, airlines are looking for ways to adjust their pricing guidelines to recapture
the business traveler market. In his article, McCartney points to attempts by major airlines to
implement “new unrestricted prices” that are not yet able to match the pricing of other alternate
discount fares, but are beginning to close the gap. In order to remain profitable in the market
place, airlines will have to continue to adapt to the changing elasticity in their market place.

As technology shapes growth and civilization continues to evolve, so too must industries
and firms in each market place learn to adapt in order to survive. Every corporation strives to
produce a product with such inelasticity that they might be able to set any price and continually
increase their profits; however, for a majority of the market place, the elasticity of products will
continue to change, affecting firms and industries. “Have U.S. Drivers Reached Filling Point of
No Return?” by Justin Lahart and “Airlines Try Business-Fare Cuts, Find They Don’t Lose
Revenue” by Scott McCartney provide examples of products that were once fairly inelastic, but
are evolving in the changing market place. The articles highlight the influential power that the
number of substitute goods for a product, the percentage of a consumer’s income spent on a
product, and the time period that a product is under construction have on the price elasticity of
demand. It is an ever-changing world, and the corporations and industries that adapt to the
changes the swiftest will be the most likely to maintain and continue to survive.