Microeconomics Analysis: Singapore Airlines and Market Dynamics

This microeconomics assignment analyzes Singapore Airlines' (SIA) acquisition of the Boeing 787-10 and its implications within the airline industry. The paper argues that SIA operates under a natural monopoly due to high fixed costs. It then explains the concept of economies of scale, illustrating how SIA can reduce average costs by increasing passenger capacity with the new aircraft. The analysis further examines the relationship between ticket prices and demand within a monopoly market, highlighting how SIA can leverage lower costs to potentially increase passenger numbers and benefit from economies of scale. The assignment includes two figures to visually represent the economies of scale and their application in a monopoly market context, and it concludes by emphasizing the potential impact of pricing strategies on SIA's market position.

Running head: MICROECONOMICS
Microeconomics
Name of the student
Name of the university
Author Note

1MICROECONOMICS
LAC
Cost
Output
C1
C2
O
Q1 Q2
Answer:
The Singapore Airlines (SIA) has bought Boeing 787-10 to obtain a significant
market position within the airline industry. From economic perspective, it can be said that the
SIA is operating under monopoly market in this country, as no other airline companies have
bought this new model of Boeing (Australianaviation.com.au, 2018). In this context, the
airline company is experiencing natural monopoly due to its higher amount of fixed cost
(Borenstein, 2016).
On the other side, economies of scale refer the situation when the long-run average
costs are starting to decline when it operates under large-scale production system (Baumers et
al., 2016). This can be described with the help of following diagram.
Figure 1: Economies of scale
Source: (created by author)
Figure 1 has represented the economies of scale for a company. To produce Q1 unit of
output, the company bears C1 amount of cost. However, the amount of cost can decrease by
C1C2 unit if the company has increased its output by Q1Q2 unit.
This concept of economics has also operated within the concerned airlines company.
For an aircraft, number of output is its total number of seat available for passengers and also
availability of tickets. To buy this new model of Boeing aircraft, the company has incurred

2MICROECONOMICS
C1
C2
Cost
Output
Economies of scale
LAC
Q1 Q2
O
huge amount of cost. On the other side, the chief feature of this model is its extra number of
passenger seats compare to its previous model. Hence, the average cost for buying this
aircraft has decreased for the SIA when the number of passenger has increased. In this
context, prices of ticket are another important concept to discuss briefly. Within the
monopoly market system, seller enjoys the monopoly power and consequently charges price
at any level. However, the concerned seller faces a negatively slopped demand curve
(Mahoney & Weyl, 2017). This implies that demand for products of this concerned person
can decrease if the price of its tickets increases. Moreover, the opposite situation can occur if
the price of this product decreases. If the SIA has charged lower price from its passenger of
Boeing 787-10 then the number of passenger can increase further and this in turn can help the
company to enjoy economies of scale. On the contrary, if the SIA has charged comparatively
higher prices for tickets from its passengers then the number demand for its ticket may
decrease by large amount and consequently total number of output can decrease significantly
((Baumers et al., 2016). This situation may lead the company to produce less amount of
output. As a result, the SIA may not experience economies of scale.

3MICROECONOMICS
Figure 2: Economies of scale under monopoly market
Source: (created by author)
According to above figure, it can be said that if the company can experience
economies of scale by significant amount then it can charge lower prices for its passenger
ticket as it can benefit from lower level of average cost. Thus, at C2 level of cost, the
company can charge lower prices for its new Boeing aircraft.

4MICROECONOMICS
References:
Baumers, M., Dickens, P., Tuck, C., & Hague, R. (2016). The cost of additive manufacturing:
machine productivity, economies of scale and technology-push. Technological
forecasting and social change, 102, 193-201.
Borenstein, S. (2016). The economics of fixed cost recovery by utilities. The Electricity
Journal, 29(7), 5-12.
Mahoney, N., & Weyl, E. G. (2017). Imperfect competition in selection markets. Review of
Economics and Statistics, 99(4), 637-651.
Singapore Airlines takes delivery of first Boeing 787-10 | Australian Aviation.
(2018). Australianaviation.com.au. Retrieved 28 April 2018, from
http://australianaviation.com.au/2018/03/singapore-airlines-takes-delivery-of-first-
boeing-787-10/