Introduction

One aspect economics most concern with is the aspect of production and consumption. Demand and supply analysis, helps us to understand the concept of production and consumption in relation human behaviour. Firms, producers or businesses cannot just assume that if they increase their prices their sales will fall or if income increase their sales will increase, the obvious question they need to answer is by how much? They need economics tool to help them to understand by how much sales with increase or decrease in relation to the above assumption, this tool that helps them to understand how responsive their sales is to a number of factors is known as Elasticity. The concept of elasticity and the factors that determines it is what this essay will examine in airline industry. For Airline industry to remain afloat in the market they need to know the impact of price changes in the market and the responses of the market to the change. In order to measure this accurately they use the concept of elasticity.

Development

This essay aims to explore the term elasticity and examine its determinants in relation to the airline industry; however this cannot be done appropriately without looking at demand and supply. Demand is the quantity of goods and services consumers wish to purchase at a given price, while Supply is the quantity of goods and services producers wish to produce at a given price (M.Ghanei 2010). Air travel is one of the lots of services consumers are willing to purchase at a given price; likewise there are suppliers who are willing to supply this service at a given price.

It will be useful to define what elasticity means, Elasticity is define as “the quality something has being able to stretch and return to its original size and shape” (Oxford advanced learners dictionary 6th edition). In Physics, elasticity is defined as “the property of a substance that enables it to change its length, volume, or shape in direct response to a force effecting such a change and to recover its original form upon the removal of the force.” (dictionaryreference.com).

This can be explained further in the contest of an employee who was allowed to do some extra hours outside of the contracted hours for extra pay. At the end of the month, the amount of extra money he will earn will depend on how much more extra hours he is able to work. Then how responsive the employee is to this offer can be seen as elasticity. Elasticity can then be calculated as:

Em = percentage of extra money you earn/percentage of extra hours worked.

Where Em is the elasticity of money the employee earn at the end of the month.

Browning and Zupan (2006) explain that elasticity measures the degree of responsiveness of any variable, such as demand and supply to a change in particular determinants. Elasticity measures the degree of responsiveness of any variable to extra stimulus.

Elasticity is measure in percentage because it allows a clear comparison of change in qualitatively different things which are measured in two different units (sloman and Wride 2009). It is the only sensible way of deciding how big a change in price or quantity. Thus elasticity is a unit free measures as the ratio of the percentage of the two variables are number without units. (Parkin 2006).

The law of demand states that when the price of goods increases the quantity demanded decreases, thus either of the number will be negative which after division will end up in a negative result, due to this fact we always ignore the sign and just concentrate on the absolute value, ignoring the sign to tell us how elastic demand is. (Parkin 2006).

Elastic demand occurs when quantity demanded changes by bigger percentage than price (Sloman and Wride 2009). Here customer has lot of other alternative goods to choose from. The value is always higher than 1, the change in quantity has a bigger effect on total consumer spending than in price. For example a reduction in the price of a branded bottle of washing up liquid say from £1.00 to 50p will prompt people buy more, which means they end up spending more on that product than they will do on a normal day, this will increase total consumer spending which is calculated as