In: Economics

# Using the demand and supply diagrams (one for each market), show what short-run changes in price...

Using the demand and supply diagrams (one for each market), show what short-run changes in price and quantity would be expected in the following markets if terrorism-related worries about air safety cause travelers to shy away from air travel. Each graph should contain the original and new demand and supply curves, and the original and new equilibrium prices and quantities. For each market, write one sentence explaining why each curve shifts or does not shift.

The market for air travel.

The market for rail travel.

The market for hotel rooms in Hawaii.

The market for gasoline.

## Solutions

##### Expert Solution

The graphs are drawn as per primary assumptions of the law of demand and positive slope of supply curve. The changes are shown and explained, due to terrorism related worry about air safety.

The market for air travel:

The demand would decrease, and the demand curve would sift left. The supply curve shift is argueable, and for this time, we safely suppose it remains constant, but it will be explained in the next scenario.

The change in equilibrium is E to E', with decrease in price and quantity.

The market for rail travel:

As rail travel can be considered as a substitute of air travel, atleast domestically, the decrease in demand of air travel would result to an increase in demand of the rail travel, and the supply curve would be ineffected (again, arguably). The demand curve would shift right.

The change in equilibrium is from E to E', with increase in quantity and price as well.

The market for hotel rooms in Hawaii:

As for tourism market, the product air travel and hotel room can be considered as complementary. Hence, decrease in air travel, would lead to a decrease in the demand for hotel rooms in Hawai, for supply curve will be surely uneffected. Also not that rail travel, yet a substitute, is not a perfect substitute, but an imperfect substitute to varying degrees; and decrease in air travel would not be totally compensated by increase in railway travel, and that is why the demand of hotel rooms would decrease. In case they were indeed perfect substitute, the demand might've been remain uneffected.

The change in equilibrium is from E to E', with decrease in price and quantity.

The market for gasoline:

In the market for gasoline, we have to assume it includes the gasoline for air, railway, and street gasoline. In this case, as air travel has decreased, and railway travel has increased, but not as much to compensate the air travel, the net effect on the demand for gasoline would be decreased. Hence, the demand curve would shift to left.

The change in equilibrium is from E to E', with decrease in price and quantity.

____________________

Note: Following is a scenario somewhere between the short run and the long run. In the long run, the demand would return to the same, and price might be a bit ambigious. The changes stated above are sufficient for a short run analysis.

Now, there is a kind of aftermath scenario. As the gasoline price have decreased, and as assumed it is indeed the input in the railway and air travel, we can say that the supply curve in both the market would shift right, as one of the input's price have decreased, and that input is indeed a significant input. Now, how much the supply would shift depends on the elsticity and severeal determinants, but that doesn't stop one from foreseeing the scenario as a whole.

Below is the graph of air travel after the price of gasoline has decreased.

And, as the supply has increased, producers can provide more output at the same price, and the resultant change in equilibrium is from E to E' to E'', for now, E' would be an intertemporal equilibrium. At E'', the price is decreased, while the quantity is increased. Now the changes depends on the shifts of the supply curve, as if the supply would've increased a bit more, the demanded quantity would return to its original position, and the price would be decreased.

Similarly, the supply curve in railway would shift right, with much more increase in quantity and decrease in price, and the demand for hotel room in Hawai will tend to return to the original position (tend to, meaning shift right, not be suddenly exactly as before). In this case, the gasoline demand would be increased, and then again the supply curve would decrease in the other market amking the changes in all the market again as before, and can be seen as interrelated chain reaction. That chain analysis is complex, but is worth a view.

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