Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue. One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket close to the departing date, define this as a risk factor because they need to make up for all unsold seats. A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket price is higher with one airline than the other, the customer interprets this as being an excessive cost. The demand is greatly affected by the external market conditions that are in existences such as taxes; by law it is legal to add taxes to airline tickets since they are considered a luxury good (Button, 2005).
The price elasticity of demand in the airlines industry depends on the number competitors that are in that route. For example in a very busy route like New York to LA the price elasticity of demand for the airlines is high, the passengers can switch over from one airline to another (Econ FAQs, 2007). They can substitute the lower cost airlines for the higher cost and so the price elasticity is high. On the other hand non-competitive routes have an inelastic demand. The article quoted below gives the example of the route between Charleston, WV and Atlanta that has a fare of $1,000 (Jerram, 1998).
In general it is difficult to substitute air travel. The other modes of transport like roadways and railways take a relatively longer time to travel. So if a person has to travel he has to use airlines. However, if the there are a ...
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...con FAQs. (2007). Air Transport Association, Retrieved January 15, 2008, from http://www.airlines.org/economics/specialtopics/Econ+FAQs.htm
FRBSF. (2002). Economic Letter. Retrieved January 21, 2008, from FRBSF: http://www.frbsf.org/publications/economics/letter/2002/el2002-01.pdf
Jerram, R. (1998). The Airline Industry. Retrieved February 5, 2008, from London School of Economics and Political Science: http://www.mega.nu/ampp/PEGB/chap11.htm
Riley, G. (2006), Externalities - Government Policy Options, Retrieved on February 12, 2008 from: http://tutor2u.net/economics/revision-notes/a2-micro-externalities-policy-options.html
Recent Policy Initiatives to Raise Low Pay. (2004). Retrieved February 10, 2008, from ACORN.ORG: https://www.acorn.org/index.php?id=203
Zabin, C. (1999). Living Wages at the Port of Oakland. Retrieved February 14, 2008 from http://ww
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