In commercial society, consumers face many decisions. The demand of one good can be affected by various factors. This report will analyze the elasticity of demand for rail use and some strategies. Firstly, the theory of elasticity of demand will be introduced. Secondly, two pieces of expert advice about cutting rail fares will be evaluated. Thirdly, the solution of the conflict will be examined. Finally, the factors determining the elasticity of demand for rail use will be investigated.
(i) Elasticity of demand is defined as “the percentage change in consumption of a good resulting from a one-percent change in its price or other factors” (Litman, 2007). According to Frank (2009, p92), “The price elasticity of demand is the percentage change in quantity demanded that results from a one-percentage change in price”. However, the elasticity of demand is not only responsive to the price, but also to other factors. For example, “income elasticity demand is the percentage change in quantity demanded with respect to 1 percentage change in income”. Moreover, “cross-price elasticity demand is the percentage change in quantity demanded in response to a 1 percentage change in second good”. According to advice 1, cutting rail fares will encourage more railway use leading to increased revenue. Nevertheless, advice 2 holds the opposite opinion. The diagram below can be supposed as the demand curve for advice 1 and advice 2 separately.
In the advice 1 demand curve, if the price is decreased from $7 to $6.5, the quantity will be increased by 40 unites. Finally, the total revenue will rise from $840 to $1040. The price elasticity of demand is є= -4.67, which means the percentage response in the quantity is greater than the percentage change in price. Therefore, advice 1 is based on the assumption that rail use demand is elastic. However, for advice 2 demand curve, if the price is reduced from $7 to $6.5, the quantity will increased by 5 unites, while the whole revenue will...
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