Question

What effect, if any, does each of the following events have on the price elasticity of demand for corporate-owned jets?

a) A decline in corporate earnings causes firms to cut their travel budgets, which in turn causes expenditures on corporate jet travel to become a larger fraction of total spending on corporate travel.
b) A new, much more fuel-efficient corporate jet is introduced.
c) Further deregulation of the commercial airlines industry substantially increases the variety of departure times and destinations offered by commercial airlines.
d) The cost of manufacturing corporate jets rises.

Answer 1

The price elasticity of demand for corporate jets can be influenced by a decline in corporate earnings, the introduction of more fuel-efficient jets, deregulation in commercial airlines, and rising manufacturing costs. Elasticity of demand varies with the availability of substitutes and the necessity of the goods. A factor such as jet fuel price increases affect the supply curve, altering price and quantity.

Step-by-step explanation:

The price elasticity of demand for corporate-owned jets can be influenced by various factors. Each event provided could potentially affect the elasticity in different ways:

A decline in corporate earnings and related cuts in travel budgets may make corporate jet travel a more scrutinized component of spending, potentially making demand more elastic, as alternatives will be more seriously considered at this higher relative cost.

The introduction of a more fuel-efficient corporate jet may make these jets more attractive relative to alternatives due to lower operational costs, potentially making demand more inelastic as the lower running costs justify the investment.

Improvements in commercial airline deregulation offering more choice could substitute corporate jet usage, increasing elasticity since there are more alternatives to corporate jet travel.

An increase in the manufacturing costs of corporate jets could lead to higher sale prices, potentially influencing demand elasticity depending on whether corporate customers see the jet as a necessity or a luxury.

Likewise, an increase in jet fuel prices will typically cause a leftward or upward shift in the supply curve, leading to a higher equilibrium price and a potentially lower quantity demanded if demand remains unchanged. However, the degree to which price or quantity is affected depends on the elasticity of supply.

For the critical thinking question regarding air travel elasticity, the differences in elasticity of demand between business and economy class could be due to factors such as the availability of substitutes, the proportion of travel budget that the fare constitutes, and the degree of necessity versus luxury perceived for each class of travel.