f demand means that the proportionate change in demand is greater than the proportionate change in price. A high price elasticity of demand may indicate, in some instances, that a firm or industry could maximize its revenues by lowering prices. Alternatively, however, it may also indicate that a firm or industry is in a competitive situation from which they may not be able to recover. Air transportation is characterized by a relatively high price elasticity of demand. Thus, relatively small price changes are expected to have a significant impact on demand for air transportation.
Supply, in economic theory, is defined as the total quantity of a product that sellers are prepared to offer to consumers at different prices over a given period. The air transportation industry tends to be characterized most of the time by an excess capacityùthe supply of the product frequently is higher than the demand, which, when coupled with the relatively high price elasticity of demand, makes it difficult for the industry to raise fare prices even in those situations when prudent business practices indicate that such increases should occur.
Price reflects the equilibrium point (or intersection) of the demand and supply for a product. Price is defined as the quantity of money which must be exchanged for one unit of a good or service. A price system is a process of resource allocation in an economy. The American economy is, in general terms, a free market economy. In a free market
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