IJC_H2_ECONS_Essay_Q1_SuggestedSolution

1 The world economy experienced subdued growth for a second year in 2013. In addition, a rising number of low cost airlines exited due to high fuel costs. These have impacts on both national carriers and low cost airlines. Explain how the above changes will affect th e world market for air travel and assess the usefulness of elasticity concepts in determining the likely impact on different types of airline carriers. [25] Introduction: Subdued growth (means slower economic growth) in 2013, increasing unit cop and no. of sellers will cause the demand and supply of air travel to change thus causing a change in equilibrium prices and quantity. Thus in view of these changes, the use of elasticity concepts can help to determine the impact on different airline carriers such as national and budget ones. Body: 1. Subdued economic growth (slower economic growth)  increase dd due to rising income but slow rate  increase purchasing power demand for more luxurious gds such as holidays  short hauls (by prefer to take by train/ship) dd for air travel increase dd shift right 2. Falling no of sellers  due to higher unit cop lower rate of profitability exit industry fall in ss 3. Simultaneous shift ↑dd < ↓SS price increase, qty fall (due to low cost carriers may not have super normal profits to sustain the higher unit cost of production) Accept any other well-explained judgment on the outcome for the air travel market. Transition to next part of essay Explain that the above factors may have differing impact on different airline carriers and it might be useful to determine the impact on them by using elasticity concepts such as price, cross, income elasticity of demand and price elasticity of supply.

Thesis: Price Elasticity of demand Cross Elasticity of demand Income Elasticity of demand Price elasticity of Supply Exit of low cost carriers airlines due to rising fuel cost Low cost carriers: Fall in ss less competitorsdd more price elastic (caters to lower to middle income consumers which air travel takes up a larger proportion of their household income) more than proportionate decrease in qty dd  TR decrease Relatively more ex when ss fall as price increase hence qty dd fall TR fall. - - National carriers: Overall fall in ss of airline carriers, price of air travel increases, demand is relatively more price inelastic, qty dd decrease less than proportionately TR increase Increase in demand as consumers switch to relatively cheaper substitute increase dd TR increase - - Subdued economic growth Low cost carriers: - - Demand for low cost carriers is income elastic for low-middle consumers more than proportionate increase in demand good TR increases Supply relatively less price inel