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Economics for Business & Management

Part 11

Question: Why do airlines charge much more for tickets purchased at the last minute, yet theatres follow exactly the opposite practice?1


Part 23

a)Firms In A Perfectly Competitive Market Make Only Normal Profits In The Long-Run3

b)Free Markets Tend To Under-Produce Public Goods4

c)Real GDP Is A Better Measure Of Economic Activity Than Nominal GDP5

d)A Reduction In Government Spending Of £100m Will Lead To A Reduction In Equilibrium GDP Of More Than £100m6

e)In The Absence Of Any Government Intervention, An Economy With A Recessionary Output Gap Will Adjust To Produce Potential Output In The Long-Run7

Part 38





Economics for Business & Management

Part 1

Question: Why do airlines charge much more for tickets purchased at the last minute, yet theatres follow exactly the opposite practice?

Answer: In case of airlines business as well as theatre business, downward sloping demand curve is experienced by the companies, and therefore they stand to gain when they can separate out customers with high prices of reservation from those paying low prices of reservation. However, in case of theaters the last minute ticket buying is related with lesser charges reservations rather than high prices reservation, which is the case in airline business associated with its ticketing. The answer to this query lies in the fact of how reservation price case of buyer is connected with the opportunity cost of time. Suppose someone waits until last minute to purchase a ticket of theater whose opportunity cost of time is high, he would risk wasting a precious evening in case a seat is turned out to be engaged, and therefore he would be willing to pay a premium for an advance ticket. Though he may also be willing to give a high price for airline ticket in order to not losing a trip, a counterbalancing fact appears significant, which is that those passengers whose opportunity cost of time are uppermost such as business travelers, be also likely to be the individuals travelers who frequently require rearranging their flight schedules for accommodating last minute contingencies. So, airlines become able to charge premium prices to these types of passengers (business travelers) by offering discounts for only individuals who are ready to commit to a particular flight schedule well in advance. Thereby, most remaining uncertain passengers (business travelers) are not made eligible for low fares, which prove to be an enormously effectual hurdle for them, specifically the requirement of Saturday night stay-over. This obstacle is easily cleared by holiday travelers as most trips of holidays involve at least a weekend.

The decisions associated with business travelers are also known to be less sensitive to airfare as compared to leisure travel decisions. Thus, the airlines charge premium price to those who serve at the last minute mainly the business passengers and offer low fares to those who reserve seats well in advance mainly the leisure travelers. However in case of theater business, the balance of forces is slightly different, i.e. high income people are relatively less sensitive to ticket prices as compared to low ...
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