Question

Suppose that you are the CEO of a discount airline that caters to students on tight budgets who want to travel to warm locations when the weather gets cold. Currently, your airline flies small regional jets from Dallas to 6 cities in Florida.

Using the model of supply and demand which would cause each of the following to happen:

1. The supply curve shifts inward

2. The demand curve shifts inward

3. The supply curve shifts outward

4. The demand curve shifts outward.

Briefly describe the situation Using the model of supply and demand and then illustrate in a separate graph for each how the curves shift and what happens to equilibrium quantity and equilibrium price.

Answer 1

Shifts in demand and supply curves take place when a change in demand and supply (respectively) takes place due to change in factors affecting demand and supply, other the price of the good.

1. When supply curve shifts inward-

supply curve shifting inward implies reduction in supply. This reduction could be because of many reasons, other than change in price of tickets, like bad weather etc. This would make the market look like as follows -

Before any change in supply curve, the demand and supply curves are original demand and original supply curve, respectively. The original equilibrium point is Eo and equilibirum price and quantity are Po and Qo respectively. You can see that the new intersection of demand and new supply (inward supply curve) gives new quantity and price as Qn and Pn. The equilibrium price has increased and equilibrium quantity has decreased.

2) The demand curve shifts inward - This implies reduction in demand. Causes could be change in taste and preferences, access to another substitute etc.

The new demand causes the equilibrium quantity and price, both, reduces. The new price is Pn and new quantity is Qn which are less than previous price and output.

3) The supply curve shifts outward - This signifies increase in supply of service by the airline. This could take place due to reasons like better technology, favourable regulations etc.

This has caused the equilibrium output increase and equilibrium price reduce.

4) The demand curve shifts outward.

This reflect increase in demand. Reasons could be many such as increased preferences for such travels.

As you can see, increase in demand has caused both, the equilibrium quantity and price increase from initial stage.