CASE STUDY: The price elasticity of air travel demand varies according to the coverage and location of the market in which prices are changed and the importance of the air travel price within the overall cost of travel.

The estimate for the price elasticity of demand for a particular route was found to be −1.4 on average, whereas the price elasticity of demand for flights from any airport in one country to another were −0.8.

Air travel price elasticities on short-haul routes were higher than on long-haul routes. This largely reflects the greater opportunity for substitution on short-haul routes (e. g. travelers can switch to rail or car in response to air travel price

Q1.Explain why demand for short-haul flights was more price elastic than demand for long-haul flights.(6)
Q2.Discuss the significance of the findings above for the pricing of fights on a particular route.(10)