price elasticity of demand
...anded (from Q2 to Q1). Therefore, to increase profits the cinema could decrease the price of a ticket, because the revenue from the extra customers would outweigh the cost of a price cut (from p2 to p1). Therefore the figure of –2.3 (elastic) is important to the company because they can use the information to drop prices and increase profits. The cross elasticity of demand for visits to the cinema with respect to the price of renting a film. This is because it tells the company how much competition there is. The actual figure is +3.8, which denotes that the two are substitute elastic. This means that a small change in price can result in a large change in demand from one good to the other. The significance of this to the cinema is that it dictates the level of competition, and whether they really need to drop prices to increase the amount of customers. In this situation, the company would benefit from a drop in price, that according to the figures would result in a shift of customers from the rental of videos to going to the cinema. Companies try to eliminate this problem by branding, advertising and promotions. This tries to make the good more attractive than its substitute, and make it more substitute inelastic. Therefore the cinema would not have to drop prices in order to compete with video rental prices, and as a consequence, reduce profits. The data says that the cross elasticity of demand for visits to the cinema with respect to the price of popcorn is –1. This means that if the price of a cinema ticket rises, then the increase in customers would lead to a proportional increase in the quantity demanded of popcorn. Therefore they are complementary, but are unitarily elastic. This is not especially significant because if more people go to the cinema then by simple logic, the amount of people buying popcorn will increase. This is only significant in that, they can advertise the popcorn to ensure that the extra customers at the cinema buy popcorn, and therefore make the cross elasticity more inelastic. (B) What factors would a cinema need to consider when deciding upon a location for a new cinema? The first factor a cinema needs to consider is the type of land (which implies the geographical location). There are three options, industrial estate, the high street or a shopping street location. An industrial estate would be an unlikely site for a new cinema. The rent would be cheaper than the high street or in a shopping centre, but due to reasons of location, that i...