1. Differentiate between the law of demand and law of supply and explain with reasons why the demand curve is sloping downwards.
2. What effect will each of the following have on the demand/Supply for Emirates Airlines? Draw a diagram for each case showing clearly the shift.
a. Unfavorable preference towards budget airlines.
b. Budget airlines increases fares.
c. Consumer income expected to decrease in future.
d. Fuel price increases.
e. Budget airlines decline in the market
f. Hyper loop is introduced into the market
3. How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is do price and quantity rise, fall, remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers.?
a. Supply decreases and demand is constant.
c. Supply increases and demand is constant.
d. Demand increases and supply increases.
e. Demand increases and supply is constant.
f. Supply increases and demand decreases.
g. Demand increases and supply decreases.
4. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes and indicate for each axis the units being used to measure price and quantity of cigarettes. Each answer carries
|
Price |
Quantity demanded
(Nos ) |
Quantity supplied
(Nos) |
|
| $1.50 | 20 | 80 | |
| 1.40 | 30 | 70 | |
| 1.30 | 40 | 60 | |
| 1.20 | 50 | 50 | |
| 1.10 | 60 | 40 | |
| 1.00 | 70 | 30 |
a. If the government decided to support the price of oats at $1.40 per bushel, calculate the surplus or shortage. Diagrammatically represent the same.
b. How will the 100% tax to be imposed on cigarettes, energy drinks in UAE affect the supply and demand of cigarettes in the UAE.
The Effect of Price Elasticity of Demand in Airline Industry
The demand for a particular good or service varies depending on a number of factors, including the levels of consumer income, the tastes of consumers, the expectations of future price changes, and the prices of related goods. As a general rule, when other factors on demand remain unchanged, a higher price for a product results in a lower quantity demanded. However, the price sensitivity to demand varies from one good to another and from one market to another. The price elasticity of demand measures the sensitivity of the demand for a good to changes in its price provided that other factors’ influences are omitted.
Elasticity in the Context of Air Travel Demand
Using a single elasticity for all market segments is inappropriate as elasticity in airline industry is anything but unanimously identical as an aggregated market. In air travel, ideally market segment boundaries should be defined by first separating leisure and business passengers and second long-haul and short-haul flights. The reason is that we expect different behaviour in each of these markets. Given that no statistical figures as to elasticity in China airline market are available, the Canadian research data is employed as follow which works the similar way by nature. The ranges of values shown capture the middle one-half of the estimates and encompass the median, which is represented by a black dot. As the figures indicate, elasticity values can and do differ significantly between travel distance, type of traveller and even domestic and international routes. Long-haul international business segment represents the highest price inelasticity, which means that price variation has little effect on passenger turnout. Meanwhile, short-haul business comes second at -0.7, which is also price inelastic. Short-haul leisure segment has the greatest absolute value of price elasticity, which means that passenger turnout is heavily influenced by pricing mechanism. In general, long-haul flight is less elastic than short-haul flight, while business sector is less elastic than leisure sector. The results are not difficult to be explained by empirical evidence. Since more alternatives become available for substituting short-haul flight than long-haul flight, passengers are more likely to switch to substitutes including automobiles, trains and boats if the price of an airline ticket increases. This is more commonly found in leisure passengers, while it is unnecessarily true in applying to business customers who are solely looking for the fastest method of transportation, making the business sector price inelastic. For example, in flying to Beijing from Shanghai to close a multi-million dollar deal and sign the contact, the high air fare is low when factored into the overall value of the trip.
According to the general principle, for price inelastic market segments, the carrier can maintain airfare at a high and constant level where profit margin is maximized despite slightly fall of passenger turnout. On the other hand, however, for price elastic market segments the carrier should consider lowering the price in order to boost higher passenger turnout. Nevertheless, in the same flights of short-haul trips, for instance, there are price sensitive leisure passengers, and price inelastic business passengers. How are the measures designed to differentiate them and charge different prices to those two different groups of consumers?
Price Discrimination in Airline Market
Price discrimination is not alone for airline market. Most businesses charge different prices to different groups of consumers for an identical good or service, for reasons not associated with costs. There are two main conditions required for discriminatory pricing – first, differences in price elasticity of demand between markets; second, barriers to prevent consumers switching from one supplier to another. While airline industry is typical on the first condition apparently, is it also able to set up barriers to separate consumers (e.g. leisure passengers) who have purchased tickets at a lower price from managing to resell it to those consumers (e.g. business passengers) who would have normally paid the expensive price? Since nobody will label themselves as tourists or businessmen when buying tickets, nor is it a fair move to openly charge differently prices for “the same good” – a seat on a given flight, Customer service agents (CSA) needs to introduce price discrimination in technical ways.
The most commonly-used “trick” in price discrimination for airline industry is “Early-bird discounts”. CSA is able to separate customers by their ticket booking time prior to departure. It encourages customers to book tickets earlier by offering lower price. The promotion is desirable to leisure travellers committed in earlier preparation for their occasional trips. On the other hand, CSA also imposes various restrictions to cheaper tickets, making them unattractive to consumers with a high valuation of time or convenience. The restrictions include a cancellation penalty, whether or not a Saturday-night stay over is required. People who book late often regard travel to their intended destination as a must-go trip and they are therefore likely to be willing and able to pay a much higher price very close to departure. The other method to achieve price discrimination in CSA is “Peak and Off-Peak Pricing”. In off-peak seasons, there is plenty of spare capacity and marginal costs of production are low. CSA is engaged in price reduction to make the most of the capacity in off-peak season by attracting passengers, particularly leisure travellers. Price reduction for business travellers should be carefully used even in off-peak seasons since they are price-inelastic, and their preference in choosing airline may focus mainly on services, time flexibility, and convenient route schedule. CSA should sell unrestricted tickets to business travellers in a bid to maintain loyalty to the carrier from this group of inelastic customers. The case in point is that CSA can reward loyal customers by giving them privilege in booking peak-time tickets at a favourable price level
Requirements
Prepare a report and answer the following questions
5. How is price discrimination practiced in the airline industry?
Scenario : Your line manager wants to finally test you on your problem identification, situational analysis, solution generation, evaluation, and decision making skills regarding various market structures and asks the same team to prepare a comprehensive report based on the questions asked below. He also wants to test your analytical, presentation skills and team work, so you along with a team of 3 other junior analysts are required to make a presentation and finally analyse the table provided in the case study.
