So, we're here in the University of Illinois at Urbana-Champaign.
And there's only one small airport here and all cornfields.
So, if you want to fly anywhere, which one would be cheaper, if you fly from
Champaign to New York, which is really far away on the East Coast, or when you fry
from Champaign to Chicago, only 2 hours north?
Which one you think would cost you less, a one way ticket?
Well, I just did a search, right now. And I've done this many years with my
students and it's usually the same. And a Champaign to New York ticket cost
you about $198, one way ticket from Champaign to New York.
And a one way ticket from Champaign to Chicago, which is just two hours from
here, New York is about 13, costs you $407.
Now, clearly, I mean, if you learning anything in this class, one thing that you
do learn is that if you want to travel in this way, you should probably buy the
ticket from Champaign to New York, and don't fly the last leg, and that's a lot
cheaper. Now, currently for probably airlines are
counting that most people aren't doing that.
So, why is that? Why is a ticket to somewhere that were all
far away charge you less than a ticket from somewhere next door?
And the, the answer has to do with the price elasticity of demand and the, the
fact that the companies have to pay attention to that when they have price
power. So, oh, a ticket from, since most airlines
when you fly from here to New York, can take you to different hops, you have three
or four or five different choices of airlines and champagne that can fly you
from here to New York. But between here and Chicago there's a lot
less airlines because some of the airlines don't use Chicago as a hub.
Some of them use Detroit, some of those use Denver, some of them use Atlanta.
So, the number of competitors an airline has between here to Chicago is a lot less
than the number of competitors that you have from here to New York.
That gives the, the, the airlines that are flying from here to New, to Chicago, a lot
of opportunity to markup their price. Because if you want to fly from here to
Chicago, you don't have a lot of options, so your demand for that tickets is very
inelastic. And the company can use that, since they
actually have price power, they can use that to markup the price.
Now, when you fly from here to New York, you have a lot of choices.
So, the company, the airline company, cannot markup the price, because since you
have a lot of choices, your elasticity for the ticket is actually quite, quite high.
It's very elastic. So, therefore they're are not going to be
able to markup the price. Now, what do I mean by markup?
What markup means when a company is charging you a price that is a lot larger
than what it cost you, cost them to provide their good.
So, let's say it cost them $150 to fly you from here to, to New York, if their price
is at $198, the markup is $198 minus $150. So, they're marking up the price that,
the, the cost $48. That is the difference between what they
charge and what is cost them. If it cost them also just about probably
less than $150 to fly you from here to Chicago, and they're charging you $450,
they have a huge markup on that price. They're charging you a lot more than what
it cost them. And what I am showing you here is that the
more elastic a good is for the stuff I sell, the less leeway I have to markup the
price, and the more inelastic is the thing I sell, the more I can actually charge you
a price that is a lot larger than what it cost me to produce it.