Question

In: Economics

Bring out the factor that may change the supply and demand conditions and thereby the equilibrium...

Bring out the factor that may change the supply and demand conditions and thereby the equilibrium price for airlines tickets. Use graph for elaboration

Solutions

Expert Solution

The change in factors of Air tickets:

  • When a country experiences a growth in the economy, the average income of citizens will increase.In this case, air ticket plays a role as a normal good, this is because an increase in the income will lead to an increase in the demand of air ticket purchased, one example is families might travel more often as they are in good economic condition. The following graph may help to understand the situation

Increase in demand for air ticket due to increased income shifts the demand curve rightward from D to D1, which further leads the quantity purchased of air tickets from Q1 to Q2. In response, the airline companies will increase the price of ticket from P1 to P2.

  • The Price of fuel has a direct influence to the demand of air ticket. When the price of fuel increases, airline industry has to increase the price of air ticket to maintain its revenue. Therefore, the fuel price and the demand of air ticket have a relationship of complements, where increase in the fuel price leads to a decrease in the demand for air ticket.

Rise in price of airticket due to rise in price of fuel will shift the demand from D1 to D2, which will eventually leads to a fall in quantity of ticket purchased from Q1 to Q2 . This will further cause the airline comapnies to reduce the price of airticket from P1 to P2.


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