Impact of Events on Price Elasticity of Demand for Corporate-Owned Jets

This article discusses the impact of various events on the price elasticity of demand for corporate-owned jets. It covers the decline in corporate earnings, deregulation of the commercial airlines industry, manufacturing cost of jets, and the introduction of fuel-efficient corporate jets.

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Question 1
The impact of the various events on price elasticity of demand with regards to corporate-
owned jets is discussed below.
Decline in Corporate Earnings
It is given that corporate earnings decline has resulted in travel budget cuts leading to
corporate jet related expenditure becoming a larger component of the travel budget. In this
scenario, it is more likely that the corporate would search for cheaper alternatives and be
more sensitive to any changes in the prices associated with corporate owned jets. This is
because any increase in the price of corporate jets would lead to significant increase in the
travel budget which the corporate cannot afford at a time when profits are declining. As a
result, it is evident that price elasticity of demand would become more elastic (Arnold, 2015).
Deregulation of commercial airlines industry
On account of the deregulation of commercial airlines industry, the flexibility with regards to
timing and destination would increase. This would result in commercial airlines emerging as
close substitutes to corporate jets. The corporate jets usually are preferred over commercial
airlines owing to the flexibility in timing and destination that is provided by them. Owing to
increase in substitutes available, the price elasticity of demand would increase for corporate
jets as when the price is increased, the corporate clients can use commercial airlines
(Krugman & Wells, 2013).
Manufacturing cost of jets rises
On account of the manufacturing costs of jets, there would be a decrease in the supply and
hence the price of corporate jets would rise. Owing to this increase in price, it is possible that
the corporate jet travel may now assume a more significant portion of the travel budget
leading to the corporate clients searching for cheaper alternatives which would enhance the
overall price elasticity of demand. Besides, the price increase would imply that the customers
may be sensitive to any further increase in the prices which additionally hints at higher price
elasticity of demand (Mankiw, 2014).
Introduction of fuel efficient corporate jet

Owing to introduction of the corporate jet that is fuel efficient, the operational cost would
come down and hence there would be cost savings to the corporate clients. This would ensure
that this new corporate jet is more attractive in comparison to the other substitutes that were
available in the market. Therefore, owing to lower substitutes for the improved version, there
would be a decrease in the price elasticity of demand for corporate jets (Nicholson & Snyder,
2015).
Question 2
1) It is known that the demand of plastic surgeries is price inelastic. It is noteworthy that it is
not given that the demand is perfectly price inelastic. As a result, the given information
implies that the changes in price of these surgeries would have little impact on their
demand. Considering that the price of these surgeries has increased, hence there would
small decrease in their demand. It would be reasonable to expect that plastic surgeries
would have a downward sloping demand curve (Mankiw,2014). Hence, the given
statement is true.
2) The formula for price elasticity of demand is indicated as follows.
It is known that the demand is inelastic which would imply that E would be lesser than 1 in
magnitude. This would imply that the percentage change in quantity would be lower than the
percentage change in price (Arnold, 2015). As a result, the given statement is false.
3) The fact that the demand of plastic surgeries is inelastic implies that the changes in price
of these surgeries has little impact on demand. The change in price of plastic surgeries
would not have any impact on the number of operations only when the demand is perfectly
inelastic. This is not the case here and there would be some impact on the operations
demand owing to which the given statement is false (Krugman & Wells, 2013).
4) The quantity demanded is quite responsive to changes in price in case of the demand being
elastic. In case of elastic demand, the price elasticity magnitude tends to be greater than 1.

However, in the given case it is known that the demand of plastic surgeries is inelastic and
therefore would not be impacted too much by price fluctuations (Nicholson & Snyder,
2015). Hence, the given statement would be considered false.
5) With regards to the given statement, it is noteworthy that elasticity has no role to play in
the same. This is because when the number of plastic surgeries increases, then economies
of scale would be realised which would lead to decrease in the cost per unit (Pindyck &
Rubinfeld, 2014). Hence, the given statement is false.
6) Considering that the demand for plastic surgeries is inelastic, it would imply that the
increase in quantity demanded of plastic surgeries would be lower than the corresponding
price drop caused by increase in supply of plastic surgeries. This would lead to a reduction
in the overall revenue. As a result, it is correct to conclude that marginal revenue from an
additional operation is indeed negative (Mankiw, 2014). Hence, the given statement is
true.
Question 3
a) Decrease, 20.25
b) Increase, 6.22
Question 4
The linear demand curve which has been provided can be analysed as shown below.

The price elasticity of demand has been indicated as Ed and the respective values have been
derived based on the analysis of the % change in price and % change in quantity demanded.
a) Based on the diagram highlighted above, it is apparent that price elasticity of demand
exceeds 1 at price of $ 650 which indicates that the demand is elastic at this point.
Hence, the point elasticity of demand at a price of $ 650 is elastic.
b) Based on the diagram highlighted above, it is apparent that price elasticity of demand is
lower than 1 at a price of $ 220 which indicates that the demand is inelastic at this point.
Hence, the point elasticity of demand at a price of $ 220 is inelastic.
c) For unitary elastic demand, price elasticity of demand should be 1. This tends to happen at
price level of $ 375 where the % change in price and % change in quantity are equal.
Demand is unitary elastic at a price of $375
d) It is apparent that as the price is falling, the price elasticity is becomes lower and is
decreasing.
As price falls, |E| gets smaller for a linear demand curve.

References
Arnold, A.R. (2015). Microeconomics (9thed.). Sydney, Australia: Cengage Learning.
Krugman, P. & Wells, R. (2013).Microeconomics (2nded.). London, England: Worth
Publishers.
Mankiw, G. (2014) Microeconomics (6thed.). London, England,NY: Worth Publishers.
Nicholson, W. & Snyder, C. (2015).Fundamentals of Microeconomics (11thed.). New York:
Cengage Learning.
Pindyck, R. & Rubinfeld, D. (2014).Microeconomics (5th ed.). London, England: Prentice-
Hall Publications