Price Elasticity of Demand

Price elasticity of demand is defined as the responsiveness of quantity demanded to a change in price. This responsiveness is indicated by movements along the existing demand curve not by shifts in the whole curve. It is important therefore when talking about elasticity of demand that we refer to a changes in quantity demanded and not changes in the demand.

The law of demand says that a fall in price will result in an increase in quantity demanded. But in order to decide whether it might be worthwhile to change the price, hotels need to know how much the quantity demanded should increase by and what the effect on customer spending will be.

If the quantity demanded is very responsive to change in price (positive or negative) then demand is said to be elastic. If the quantity demanded is NOT very responsive to a change in price then it is said to be inelastic.

An example of inelastic demand could be a sales tax on selected commodities so the government can raise more money. Which goods would it select? It will need to choose those goods that yield the most revenue to the government and balance minimising the unpopularity of the decision. The demand for the items selected must be inelastic so that the price increase will result in additional revenue. Goods like alcohol, tobacco and petrol and good candidates of taxes to raise revenue as the demand is fairly inelastic.

Goods like bread and milk are also inelastic however a necessity that would yield unpopularity.

An example if elastic demand is if a publisher raises the price of its magazine by 10% and the quantity demanded (not the demand as it is still there just not prepared to pay the higher price) fell by 20%. Then it’s demand is elastic, revenue will suffer if the correct price and quantity demanded relationship is not in balance.

Most of the market segments in the hotel industry are elastic which is why applying revenue management techniques and constantly balancing the relationship between occupancy and average rate is very important. As is establishing the correct price points per market segment to ensure the optimal quantity demanded per segment is at is maximum point.

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