Question

20. This question is about the market for air tickets. For each of the following separate scenarios, draw a graph to show how the equilibrium price and equilibrium quantity will change.

(a) Household income decreases

(b) Oil price decreases

(c) Price of train tickets decreases

(d) Flight attendants protest for an increase in wages

Answer 1

Air tickets is a normal good.

In all 4 graphs, D0 and S0 are initial demand and supply curves intersecting at point A with equilibrium price P0 and quantity Q0.

(a)

A decrease in income will decrease demand for airline ticket, shifting demand curve leftward, decreasing both price and quantity.

In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(b)

Lower oil price will decrease cost of operating flights, which will increase supply, shifting supply curve rightward, decreasing price and increasing quantity.

In following graph, S0 shifts right to S1, intersecting S0 at point B with lower price P1 and higher quantity Q1.

(c)

Lower price of train ticket, a substitute for air travel, will decrease demand for airline ticket, shifting demand curve leftward, decreasing both price and quantity.

In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(d)

Higher wage will increase cost of operating flights, which will decrease supply, shifting supply curve leftward, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting S0 at point B with higher price P1 and lower quantity Q1.