Question

An airline charges $2,100 for a first-class roundtrip ticket from Boston to Los Angeles,

and charges $370 for an economy-class roundtrip ticket on the same route. The airline

observes that every seat in economy class is full, and that much of the first-class cabin is

empty. Sketch a graph that represents the supply and demand for first-class roundtrip

tickets in this market. Briefly explain why this first-class ticket market is not in

equilibrium when the daily price of a ticket is $2,100. On your graph, clearly indicate the

gap that represents the size of the shortage or surplus this market is experiencing.

Answer 1

As we Know supply is positively related to the price and demand is negatively related to the price. Hence supply curve will be positively sloped curved and demand curve is negatively sloped curve.

Below is the graph of supply and demand of first class seat where the positive X-axis is number of first class seat and positive Y-axis is the market price.

Since in first class there is still seat vacancy left at the price $21000 , this mean that the supply of the first class seat is higher than the seat occupied that is the demand of first class seat itself.

Hence, Demand < Supply

This implies excess supply which is given by,

Supply - Demand.

hence below is the detailed graph where P_e and Q_e are the equilibrium price and quantity respectively which is the situation when at $21000 whole seat is fully occupied i.e. supply = demand. Excess supply arises for any price level which is higher than the P_e .