Question

Discuss in the context of the income elasticity of demand for air travel, the effect on the revenue of airlines given that there is a large decrease in the income of consumers. Does your answer depend on the price elasticity of demand for air travel? Explain using a suitable air travel market diagram.

Answer 1

Income elasticity of demand = %change in quantity demand of airline / %change in income

Airline is considered to be luxury good or have elastic demand as people use it for vacations more than business activity which can be reduced in hard times. As people got their salry cuts we cay say there is decrease in income, people have responded by reducing quantity demanding more than decrease in income due to salary cuts and maintain social distancing. It will reduce the revenue of airline industry.

Market of airline industry is: