Demand and Supply

DEMAND AND SUPPLY 1
ECONOMICS ASSIGNMENT
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DEMAND AND SUPPLY 2
Question1
a.
The ticket prices will increase because of the increase in the cost of the skyrocketing fuel. When
the price of the fuel goes up, the quantity will go down. Skyrocketing fuel is a complement
product for the airlines. So, an increase in its prices will lead to an increase in the ticket prices
for the airlines. This increase in the ticket prices will result in a decrease in demand for the
airlines in the future. Having the initial price at point P0 and the quantity at point Q0 as shown in
the diagram below, point E0 is the equilibrium for the airlines demanded. When the price goes up
to point P1, the quantity demanded decreases to point Q1 causing the equilibrium of the airlines
demanded move from E0 to E1 along the demand curve.
Figure 1: change in Equilibrium Price and Quantity.

DEMAND AND SUPPLY 3
In the above diagram, the other factors affecting demand are assumed to be constant. This is the
reason why there is a movement of the equilibrium from E0 to E1 along the demand curve. The
future expectation of the prices of the skyrocketing fuel to go up is the only determinant causing
this movement of the equilibrium.
The demand in the future will also decrease due to this factor of expecting the ticket prices to go
up (Wang and Lai 2010, p.868).
b.
In the current market, the demand for airlines will increase due to the expectation of prices of the
tickets to go up. This will make the airlines experience more customers (consumers) than in the
future. According to the diagram below, the demand curve (D0) will shift to the right to D1
causing the equilibrium shift from point E0 to E1.