Sep 11 2007
Someone help me, I’m “addicted” to air travel!
Published by Jason Welker at 8:58 pm under Elasticity
BBC.co.uk – News – Science/Nature – “Brits ‘adicted’ to cheap flights”
As we continue to learn economics, you’ll begin to realize more and more how important this field is to truly understanding how things in our everyday lives work. For example, how will people respond to the increase in a product’s price when the government places a new tax on the product?
Chapter 18 of our text discusses the implications of price elasticity of demand on governments’ decisions of what types of goods to place excise taxes on. Given an understanding of PED, we as economists understand that taxes will earn the most revenue for a government when placed on goods for which the PED coefficient is less than 1. In other words, revenue seeking governments should tax products for which demand is highly price inelastic, and avoid taxing products for which demand is highly price elastic. This just makes sense: when the price of an inelastic good goes up, consumers will respond very little, while an increase in the price of an elastic good will scare away a relatively large number of consumers, meaning a decrease in total revenue (tax revenue in this case).
In addition to elastic and inelastic price elasticity of demand, we also discussed today the theoretical existence of products for which PED is perfectly inelastic. In the article linked above, geographers from the University of Exeter in the UK share findings from a study that seem to indicate that PED for air travel in the UK is perfectly inelastic:
“The government raised air passenger duty in February, and the European Union is set to include aviation in its Emissions Trading Scheme (ETS), which could increase costs further.
But the Exeter research suggests price hikes would have a minimal impact.
‘We found that flying is quite embedded in peoples’ lifestyle choices,’ said Stewart Barr from the university’s Department of Geography.
‘And it’s not people on lower incomes taking these flights, it’s middle class people taking more flights to go on city breaks, and they can afford to pay higher prices.’”
According to the Exeter geographers, because “flying is quite embedded in peoples’ livestyle(s)…” the increase in price resulting from the new taxes should have “minimal” impact on air travel. When most people say “minimal”, what they are implying is “none”… in which case we as economists can translate the geographers’ statements as thus: “the price elasticity of demand for air travel in the UK is zero (or darn close to it!)”
Could this be true? Do you think air travel has a PED of zero? If so, what are the implications for airlines? What are the implications for travelers? Could the geographers be wrong? What about air travel makes demand for it so price inelastic? Discuss!!
Hat tip to Professor John Palmer at EclectEcon for the link to this article.
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About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this authorNo related posts.
Even though traveling by air is very popular amont people – especially the middle and upper class when they take vacations and business trips – I don't believe that the PED of air travel is zero. It is impossible that if the government raised the taxes on plane tickets that everyone would still go on their vacations. If it was raised by only a little, then I don't think it'll make much of a difference. But if a large tax was placed on it, I'm sure middle class people would find some other ways to go about their ways, such as with boats and cars.
The implication of this for consumers is that, unless they are willing to pay a lot more for their traveling fees, they will have to resort to using other methods of transportation. This means that they can only travel to closer places (for example, British people won't be able to go to America, unless they don't mind a week's worth of boat rides), and their activities are limited as well. For the airlines, new complications such as a decrease in consumers may occur (unless the PED is zero, which is unlikely).
Although I personally don't think that air travel is perfectly inelastic, I can see why it could be. In a world where everything is developing so fast, there are more things to see but not enough hours in a day. People are also busy and with increasing incomes, we try to find ways that are most efficient for long distance traveling, which is by airplane.
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People who are used to traveling around the world in airplanes has become very ingraned in our life style. We can't even go 6 months (most of us) without hopping on a plane. But are we bad people? I don't think so. Tim Sun is a shining example of that.
We live far from our family and homes in our home country, and taking a boat simply is silly.
We don't have to stop taking airplanes but we can be constructive with our choices.
Go Bowing
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Not only family goes on family trips for vacations, but most of the time what i saw is that business people go on trips more often. A price increase in the short run could be inelastic, because those business people can't just be like oh the price of the tickets gotten higher, I'm not going to attend the
meeting in China, they would probably get fired. So in the short run they have to accept the price change. But in the long run, they would have more time to make reponse, so the PED will be more elastic.
If the geographer's statement is true, then the airline can keep on raising the price and peopel won't mind it. So basically he's saying that airlines are monopolies, which i don't think it's true. Most people will stop going to the airlines when the price is getting higher.
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I don’t think that air travel has a PED of zero because this would mean that a change in price would have no effect on the quantity demanded. If the price of air travel would increase by 70% then I am very certain that the demand would decrease drastically, since most travelers will not be able to afford the travel. However, there are not a lot of substitutes for airplanes. Could you imagine people travelling with a boat for holiday? That is quite bizarre.
A change in price of air travel will have different effects on people who are travelling for leisure and for people who are travelling for business. The PED for air travel for business purposes might be very close to zero (inelastic), since it is their job to go attend that specific conference or meeting. They cannot afford to miss it. As a result, different buyers will respond differently to the price changes. Air travel could be considered as a luxury good, since it is not a necessity. However, this might not apply for business travel, since it is a necessity to keep the job and it is not considered as a luxury good.
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