Price Elasticity of Demand

Elasticity is a sub topic of demand theory and I talk about this topic to my students again and again since 2009. It is a simple concept but for some students, it looks like this topic is so difficult to understand. I will explain again in this blog so that my students can always refer to this blog and hopefully they can understand well. So ECO162, ECO415 and ECO556 students: please take note.

Elasticity or "keanjalan" in Malay is a theory where we want to see how responsive we are when there is a change in something. I normally change the word elastic to sensitive or responsive, so that we can relate it with our daily life. Let me talk about price elasticity of demand. We learned in class, to calculate price elasticity of demand, we use this formula:

What can you see from this formula? It simply shows how sensitive we are when there is a change in price. Do you sensitive when there is a change in price? If you are sensitive, what is your response? How big is your response? Of course, different people will have different response. Those who are rich, will be less sensitive, or not sensitive at all. But for normal people like me, and maybe for most of us, when there is an increase in price, we will tend to reduce our consumption. So the change in consumption, before and after the price change, is our response towards the change in price, and this is what we call "elasticity". 

I give you one simple example. Flight ticket. For me, flight ticket has an elastic demand. Look at AirAsia, why they always give discount? It is because the demand for flight ticket, in general, is elastic. It means, people are very responsive towards the change in price. If Air Asia give discount, more and more people try to buy the ticket. So their total revenue will increase. 

Then, let us talk about factors that affect price elasticity of demand. Let say you buy Air Asia ticket, do you think everybody in the same flight pay the same price? The answer is NO. The one who sit beside you maybe pay much higher price than you. Again, we can relate this situation with elasticity. For us, when we travel somewhere, we will choose a date and the lowest price possible. To get a lower price, we will buy the ticket three or four month before the departure date. But, for businessmen for example, if let say they have an urgent meeting, they need to buy the ticket at any price, even at higher price. So what we can here is that the time period plays an important role to determine elasticity. For the businessmen like that, the demand will be inelastic, not like us. The ticket for them is a necessity good, so they must buy it at whatever price. 

Another factor is the availability of substitute. If we have let say five companies like Air Asia, we will always have an option to find the lowest price possible. If Air Asia increase its price, we can easily use Malindo Air and buy the ticket. So, the more the substitute, the more elastic the demand is. If we do not have any substitute, you like it or not, you have to buy with Air Asia, then the demand is inelastic in this case. 

Hope you will get better understanding regarding this topic. Bye bye :-)

Bangkok Trip (Part 1)

During mid semester break recently, me and my colleagues from department of economics visited Bangkok for our leisure trip. We went there from 12th April until 17th April. The decision to go to Bangkok was set just a month before the trip as the department members choose Bangkok as our destination. 

The task to book flight and hotel is given to our travel sifu Cikgu Hasan. We booked flight and hotel using AirAsia Go and the price is RM520+ for return flight ticket and hotel for 4 nights. If you want to go to Bangkok, make sure your hotel is near to any BTS or MRT station because it is easier for you to go here and there by train. In our case, we stayed at Nantra De Comfort Hotel in Thonglor, Sukhumvit. The distance to Thonglor BTS Station is about 700 meters. 

I'm the one who set up the itinerary for the trip based on my previous experience in Bangkok. So I set the itinerary that suit our budget and visit as many places as we can in 4 days. The date that we choose is Thai New Year or Sonkran, so the price is little bit expensive at that time. But, this is the only time that we have, so we proceed and hoping everything will be fine. 

Getting the taxi at DMK

We arrive at KLIA2 around 2 pm and the departure time is tentatively at 5 pm. But the flight delay by 1 hour, so we depart around 6 pm and we arrive at Don Mueang International Airport (DMK) around 7 pm local Thai time. At DMK, you can choose whether to use a chartered taxi or metered taxi. To save cost, we opt to use metered taxi but we need to queue before we get the taxi. So for 13 of us, we need 4 taxis. The price is around 250 to 350 baht (including airport charge) depending on driving style and traffic. For my taxi, I need to pay 340 baht that day. We arrived at hotel around 9 pm, check in and go out for dinner. 

Fresh fruits

Arab Street at night

We go to Arab Street for dinner since we can easily find halal food here and for sure it is open until midnight. We took BTS to Nana Station and this is the nearest station to Arab Street. So anytime if you go to Bangkok, and do not know where to get halal food, this is the place. The price of the food is quite expensive but it is reasonable at this area. I ate seafood fried rice and coconut juice for 220 Baht, around RM 25. After dinner, we walked about 4.3 KM to hotel because the train station is already closed ha ha. Tired. Sleep.

Fresh juice

Alhamdulillah

I'm Back

Its been a long time since I left this blog unattended. I think its about time to consider to do some write up. I will share my experience with you, and share basic economics issue and explanation especially for my students. Lets spread the knowledge.