Aspects of Microeconomic Theory

Aspects of
Microeconomic
Theory

INTRODUCTION
The report is based on the dilemma faced by companies in airline industry which fell
victim of a disastrous cycle of low fares. This dilemma was most probably reflected in years of
2018 and 2019, but was not a result of any sudden crisis but a long run result of various
consequences. Situation of low fares and sinking profits for airline companies became more
popular among public when CEO of Ryanair, an acknowledged airline company of United
kingdom pushed hard on this fact and mentioned any further decline in fares were not possible.
CEO listed many negative outcomes of this situation faced by Ryanair and others.
Report have analysis of this problem of Ryanair with the help of microeconomic
concepts. For this purpose report have used two essential concepts of Supply-Demand and Cost-
profit, followed by a meaningful conclusion.
FINDINGS AND DISCUSSION
The article that appeared on BBC news website is the one referring to the thoughts and
arguments made forward by the Chief Executive officer of one of the known airline company of
United Kingdom Mr Michael O'Leary. Mr O'Leary is the incumbent CEO of Ryanair and from
the argument that were made on January 2019, where he seems worried about the profits of
company. Profits were in danger due to the business environment and sentiments prevailing that
time. Although change of decreasing prices was initially triggered due to changed consumer
preferences when consumers were not ready to pay for services at existing prices, but situation
was more worsened when business environment changed (Browning and Zupan, 2020). The
environment in airline industry was sticking over fighting competition and achieve market share
through strategy of low fares. However the strategy of this nature is competitive but a cutting of
fares by all players in the market which then generate a sentiment that this is the only left choice
before all. This leads to quite dangerous circumstances in the market. This leaves companies to
fall into a vicious trap where either they have to decrease the prices for remaining in market and
competition or they will lose their market share because customers will move over to companies
offering low fares. Hence they are left with only choice of decreasing fares. This lead to the
problem where businesses starts incurring losses and their existence itself gets in danger. This
point was made more clear by Mr. O'Leary while putting forward the fact that sentiments of
reducing fares to attract more and more customers have taken to directions where many rival

companies h such as Flybe are now over the verge of sales. Mr O'Leary further goes on pushing
that companies in the airline industry should move out now from this low-fare market technique
as the customers were already enjoying a fairly low priced service and there was now need for
compani9es to look after their own share. The prices of fares that time had already fallen below
much to the point when even the predicted profits of Ryanair were decreasing and therefore one
can easily imagine the situation for actual profits for the company. Mr O'Leary further made his
points more clear about decreasing profits when he made mentions of Strikes of workers which
had already impacted profits of Ryanair negatively in October. Strikes made by workers and its
impact over the profit on Ryanair were seen in half-year results at all. Ryanair witnessed a
decline of profits of 7%, which was solely the result of strikes by workers (Cowell, 2018).
In this report it is attempted to understand that what does the low fares technique of
fighting competition and attracting customers through this mean for market as well as companies
in market. For this report shall be taking help of various concepts and principles of
microeconomics and while studying and applying with position of Ryanair, report will try
developing a good insight on this issue. Concepts of Microeconomics are helpful because the
study itself deals with positioning of an individual firm in market. For this purpose two most
supportive concepts experting to this issue are taken:
 Supply and Demand
 Business organisations Cost and Profits
Supply and Demand
Demand
Understanding the effect of demand first, over the new prices that were established in
market and for Ryanair as well, this effect can be directly related with leftward shift in demand
curve. Their had been the problem occurred in market of airline industry where consumers were
demanding services of transport at the low prices. This was the new consumer sentiment
prevailing in the market. Consumers or passengers were not agreeing to avail services at existing
prices and trafficking was getting decreased (Curtis and Irvine, 2018). Thus became a
compulsion for Ryanair to decrease its price in order to attract customers and maintain
continuance of its operations. This situation to decrease price was the one which was driven by
external factors of consumer preferences, the factor which is beyond the market forces of prices
and thus it is the one pertaining to shift in demand curve. Otherwise in normal circumstances