Question

What does the following statement imply about price elasticity of demand? "Airlines experiencing higher traffic with reduced fares, but are struggling with fall in revenue."

Answer 1

The statement implies that price elasticity of demand for airline tickets is less than one, that is, the demand for flights is inelastic.

When total revenue falls as a result of decrease in prices, it implies that the demand is inelastic (by total expenditure method). When total revenue changes in the opposite direction compared to change in prices, it implies demand is elastic (elasticity greater than one). When total expenditure (or total revenue) remains the same with change in prices, the demand is unit elastic (elasticity equal to one).

When airline reduces price, total expenditure falls but less than proportionately compared to the fall in prices (when price elasticity is lesa than one). So total revenue falls and airlines struggle with the falling revenue inspite of increased traffic.