Elasticity of Demand and Decisions for Spring break

Elasticity of Demand and Decisions for Spring break

By Alice ,Congi ,Linda and Isha

Spring Break is just beyond the horizon! With a much-needed break in this cold, dreary semester, many of us yearn to go home for hot meals and hotter showers or to travel to someplace warm. With Mount Holyoke’s diverse campus full of people from all over the world, there are numerous factors in deciding how to spend this break--different income levels, different price tags, and thus endless possibilities of plans to be made.

Let us, look at two Students Joyce and Hannah. Joyce is an International student from Dubai where as Hannah is from California. They have the choice to either go home or go to Miami for spring break. During planning they would face problems like where to go? Which plane ticket to buy? How much money do they have?  So taking this as an example we will be discussing the elasticity of demand and how factors such as income and price affect it when Joyce and Hannah plan for spring break.

Factor 1: Income

First, let’s assume that Joyce and Hannah have the same preference which is traveling. For this example we will say that they choose to go to Miami. If we keep price constant and only look at the effects of income we will see shifts in demand as well. Lets look at how can their income affect their decision to buy plane tickets:

Both Hannah and Joyce have the same plane ticket price as $500 for Miami. Joyce had an income of $600 and now it increased to $1000. She could previously buy 1 ticket where as now she can afford to buy 2 tickets to Miami, perhaps one more for another vacation.

If we look at her Income Elasticity of demand we see:

IEoD= (%change in quantity)  = [      (2-1)/2     ]     =  1.5

            (%change in income)     [(1000-600)/600]

     Here we see that Joyce’s IEoD is more than zero. If the IEoD is more than zero it means the good they are buying is a normal good.

Factor 2 : Price change
         

        Now lets look at our case from another point of view. Airline companies are known to raise the airfare prices when vacations or holidays are near. Price is an important determinant to our students’ buying patterns. To only explore the effect of price we keep Joyce and Hannah’s purchasing power the same.   Both Hannah and Joyce think about going home. 

       

    If Joyce goes back home to Dubai, it will now cost her 1500 but the airfare for summer was $1000. At the previous price last year she bought 1 ticket to go home. Now she feels the price is too high and her consumption will be 0. With this information lets look at the PED in Joyce’s case:

Q1:1      Q2:0              P.E.D=  (ΔQ /Q)           = [   (0-1)/1      ]          = 2   [ P.E.D>1]

P1:1000  P2:1500                      (ΔP/P)                [(1500-1000) /1000]

Her Demand graph would looks like this:

From both the graph and example we see that the demand of plane tickets for international students like Joyce is very elastic. A change in price will affect the consumption highly. This is why the demand curve on Joyce’s graph looks almost flat. If the plane ticket prices had gone down, Joyce’s consumption would have risen greatly.  

        Looking at Hannah’s situation: a market for domestic college students buying plane tickets to go home. The airfare to go back to California is $300 during spring break, but at other times in the year it is $150. Last year when the price was $150 Hannah bought two tickets for two different weekends. Now for spring break she only buys 1 ticket. The PED here would be:

Q1:2      Q2:1              P.E.D=  (ΔQ /Q)       =      [   (2-1)/2      ]          = 1/2  [P.E.D<1 ]

P1:150   P2:300                           (ΔP/P)                [(300-150) /150]

The demand graph for Hannah would look like this:

 From both the graph and example we see that the demand of plane tickets for domestic students like Hannah is very inelastic. She can easily afford and will choose to go home. This is why the demand curve in Hannah’s graph looks almost vertical and a change in price will not greatly affect her consumption of plane tickets.

      Although the income and affordability affect the students in their decisions, price is also an important player. In the same market for plane tickets there can be various demands with different nature of price elasticity.

Therefore price and income changes greatly affect Joyce and Hannah's decision for spring break. Regardless of where they choose to go these two factors are key in their planning for Spring break. Using these factors Hannah, Joyce and other students in similar situations can analyze the elasticity of demand and how it is affected by the factors we discussed.