Draw a standard competitive market diagram showing the demandand supply of seats in the air...

Draw a standard competitive market diagram showing the demand and supply of seats in the air travel industry to show the impact of Covid-19 on equilibrium price and quantity.
Draw a standard diagram of a typical competitive firm in the airline industry to show how the firm might suffer losses due to the impact of Covid-19 in #1 above.

Expert Solution

Due to travel restrictions all around the world (ever since the start of the pandemic) the demand for air seats have fallen substantially. This causes the demand curve to shift to the left. In the digram D0 shifts to D1 causing equilibrium prices to fall to P1 from P0. This also reduces quantity supplied along the supply curve to e1. So equilibrium quantity falls to Q1.

In the standard PC firm diagram, I have started that the initial situation when price was P0 (=MR0=AR0 for PC) then industry was in long run equilibrium. Hence industry was earning normal profits only (AR0=AC0). Due to the pandemic induced demand shock there has fall in price levels. From this alone we can see the average costs of the airline is way above the average revenue (in PC, firm is price taker and so P1=MR1=AR1 < AC1). So airlines is making losses. Losses is represented by area of rectangle AC1P1xy.

Rahul Sunny answered 2 years ago

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