Elasticities of Demand Essay As the income elasticity of demand for visits to the cinema is +2.5, this means that the cinema is Income Elastic as the value is greater than 1 and is regarded as a normal luxury good. Therefore, the cinema would know that if income of consumers rises, demand for their service will rise accordingly by 2.5%. Therefore, the cinema would be more likely to register a profit during a period of economic growth as supposed to a recession, where consumers may revert to cheaper inferior goods such as DVDs. This is significant as it indicates the company may suffer if there is a downturn in consumer's disposable income, however also knows that if the price of tickets remains constant then there will be a significant rise in demand at that price if Income rises. An Income elasticity of +2.5% will result in an outward shift in the demand curve, as demonstrated by the diagram. Price D2 D1 Income Inferior: n < 0 P1 Basic or necessity: n < 1 Q1 Q2 Quantity -Luxury: n > 1 Quantity Additionally, the price elasticity of Demand for Cinema tickets is -2.3%. This means that cinema tickets are price elastic as the value is greater than 1, and that therefore if the price of cinema tickets rises, demand will fall by a greater amount than the percentage change in price. For example, if the cinema increased prices by 10% from £10 to £11, demand would fall by 23%, which when calculated ff23/10) = a price elasticity of -2.3%. This is significant as the cinema company would know that raising prices of tickets would result in less profit overall due to the demand falling by a greater amount. However, it also knows that if income rises, they may be able to raise prices and experience a rise in demand as YED is +2.5% which is greater than the -2.3% of PED, resulting in an overall increase in demand of +0.2% if they were to pursue this option in that scenario. The Cinema would therefore also know that lowering ticket prices would attract as a % more customers than the % fall in ticket prices, resulting in greater profit from the increased demand, as demonstrated by the diagram on the next page ffsource: www.tutor2u.net)
Price P1 Lost revenue from selling at a lower price Demand P2 Increased revenue from selling more at a lower price Q1 Q2 Qty As the Cinema and Netflix are substitute goods for one another, they have a Cross Elasticity of Demand ffXED). The XED of the Cinema to the cost of using Netflix at home is +3.tt%, indicating that if the price of Netflix were to increase by 10%, demand for the Cinema would increase by 3tt%. As the value is greater than 1, the company will know that there is a high Cross Elasticity between the Cinema and the cost of using Netflix at home ffthus they are close substitutes), and that therefore business will increase/decrease