Question

If Qantas becomes the only firm in the airline industry, discuss the three (3) barriers of entry it would create to remain as the single firm in the airline industry.

Discuss the two (2) advantages of the creation of Qantas as a single firm in the airline industry. Consider also whether it is good for the allocation of resources in the economy.

(a) Given the disruption arising from the Covid-19 pandemic, discuss one (1) other possible factor that might change demand for air travel and one (1) possible factor that might change the supply of air travel.

(b) It is likely that we will experience a rise in the price of airfare in the future. Explain your answer using demand and supply analysis. Will the price elasticities matter?

Analyse the economic problem for the government if it wants to financially support the airline industry by applying the concepts of scarcity, choice and opportunity cost.

Answer 1

Three barriers of entry it would create are

(1) Competitively low airline prices, which would make it hard for other firms to enter.

(2) Low cost of production so that the air fares are cheap.

(3) Monopoly over certain routes so as to limit other airlines.

Two advantages of Qantas as a single firm in the airline industry would be fare prices which are favourable for them for profit making, and focusing on routes which are advantageous and profit making.

It is not good for the allocation of resources in the economy as there will be inefficiency in terms of price exploitation of resources such as oil being bought at a lower price because of monopoly.

(a) One possible factor which might change demand for air travel is increased health risk and one possible factor which might change supply of air travel is increased financial and economic distress for the airline to function, which will limit the routes and number of flights.

(b) Yes, there would be a rise in the price of airfare as limited number of people will demand, which will lead to decline in supply of routes, as airlines will frame routes and keep flights as per their profitability criteria. The extent of price elasticities will matter as higher the price elasticity, higher will be the change in demand, thus higher the prices of airfare, lower will be the demand.

Economic problem for the government is that limited number of people want to travel as there is scarcity of routes and demand, plus consumers choice has also changed because of health risks, thus they want to travel less. Consumers forego an opportunity cost of higher airfare and health risks which proves advantageous for them. Thus there is limited demand, wherein it won't be profitable for the government to financially support the airlines as there are several constraints which are not likely to increase demand.