now we're ready to take a look at the fair changes that Airlines make every day so we looked at the initial market pricing sort of the strategy of how Airlines enter uh new markets with a pricing structure now we're going to take a look at the um the fair changes so uh the two changes that can occur of course are increases and decreases and we're going to take a look at them uh separately and the first one we're going to do is the fair increases so let's take a look at the demand curve that we
uh were using in one of our earlier videos so let me draw that again we had some some sort of demand curve that looked like something like this uh let's see if I can straighten that out a little bit so it doesn't have to be that perfect the downward sloping demand curve and if you recall we said that along this straight line demand curve there were different elasticities around the midpoint we had elasticity equal to one so elasticity was equal to one and we said that was unit elasticity and um and remember we said when
uh demand is at unit elasticity Revenue was maximized so let's let's draw that back into we had uh the revenue was represented by the area of this rectangle and if you can find the price that Max maximizes the area of that rectangle you would have the uh optimal price so that would be a p like P star for optimal and qar for optimal um okay so when elasticity equals one you're at the maximal revenue which is the optimal price and quantity for for one given Fair um and we said that above that point above that
midpoint on a straight line demand curve that portion of demand is considered elastic so elastic is where elasticity is greater than one elastic and below the midpoint we had the portion of the demand curve which was in elastic and that's where the elasticity is uh less than one okay and this is the portion of the demand curve that we're going to operate in when we're uh looking at Fair increases because as we said when demand is inelastic raising the price will result in an increase in total revenue so if you remember our definition of elasticity
it was the percentage change in quantity as a result of the percentage change in price so when demand is in elastic a increase a percentage increase in price will res in a smaller percentage decrease in quantity and that will increase so let's try to illustrate that by putting in let's say we're at our initial price was P let me use a different color here uh green let me say our our initial price was p not and um let's get my line here so we're at this price and at that price we have a quantity of
Q not okay so p and Q KN and we're in the inelastic portion of the curve so knowing we're at in the inelastic portion of the curve we can increase that price from P KN to Q excuse me P KN to P1 and then see if I can get my line back here and that's okay close enough right let's see if move that over just a little bit and P1 will result in a new quantity demanded of q1 and this area this area here is greater than this this area down here here so since we
were in the inelastic portion of the demand curve increasing the fair from in this case from P not to P1 actually increased uh overall uh Revenue so if the pricing analyst knows that she's operating in this portion of the demand curve she knows that uh demand is in elastic or has a you know pretty good feeling that the demand is in inelastic at her uh current price it stands to reason she's going to want to increase it from the current price to something higher to that now you know I said in practice I mean you
know it it's really hard to know what the demand curve looks like it's certainly not linear and and you really don't know where this midpoint is so the analyst is trying to approach that midpoint she's not even really sure that demand is inelastic she's she's going from um some data analysis some uh some history of how the flights are booking up in this market and some of it is just intuition um but she's going to attempt to get closer to that midpoint from moving from where she is to some higher price so let's put some
numbers in here and and create an example uh let's say let's say p not was $100 I think that'll be easy to work with and P1 see if I can get the right color here P1 sorry P1 is we're going to say it's just a 10% increase to $100 and uh oh I don't know if this was off the screen let me scroll a little bit for you here uh yeah and let's put some quantities in here let's say the uh initial quantity was oh I'm sorry now I see what um let make that P1
at $110 the initial quantity was um well let's say 50 at Q so at $100 50 seats were demanded and at P1 uh see get back there let's say the quantity demanded fell to 48 so a 10% increase in price resulted in less than a 10% decrease in quantity I think that's what's that a 4% decrease so we know from our um study of elasticity that in this case Revenue will actually go up uh but because I want to continue with this example through a couple of uh uh different scenarios I think I'll actually put
the numbers um yeah let's calculate this out so we have a good example to continue to work with Okay so let's let's say let's write it over here let's say p I'm choose a different color here go with red I think so at um price when the price was $100 the quantity was 50 seats and revenue totaled $5,000 and when the price increased to $110 the quantity decreased to 48 seats let's get our calculator out here and what is that 110 time 48 equals $5,280 so Revenue increases to $5,280 so when this Airline is acting
on its own uh looking at its demand curve and increasing fairs by 10% they will increase Revenue by uh $280 whatever that percentage increase is
