Economics Elasticity

Topics: Supply and demand, Economics, September 11 Pages: 3 (525 words) Published: March 17, 2013
CE 2_JC1_2013_DD_SS_ELASTICITY_NOV04_A_lvl CE 2 PART (a) The terrorist attack on New York on 11 September 2001 caused a worldwide recession and an increased fear of flying, both of which severely affected the demand for travel by air. This led to the closure of the major airlines in the world. (a) With the aid of diagrams, explain how the recession and the closure of some of the major airlines of the world affected the market for air travel. [10]



Part a)

Sept 11 Terrorist Attack on New York

Worldwide recession: ⇒ Recession 2 consecutive quarters of negative economic growth ⇒ Assuming air travel is a normal good ⇒ Recession: Fall in world income fall in purchasing power of households Ceteris paribus, will lead to a fall in demand for air travel, a normal good. ⇒ Increased fear of flying: Change in taste against flying fall in demand for air travel, ceteris paribus. Price • • • Referring to figure 1 : Initial equilibrium, E1: Initial price, P1; Initial Qty, Q1 Effect of recession & increased fear of flying on demand reinforced one another significant fall in demand. There will be a leftward shift in the demand curve from DDo to DD1. Explain the market adjustment process: At the original price, P1, Supply > Demand surplus. This causes a downward pressure on price. As P falls, there is a movt down D1 and qty demanded ↑. At the same time, there is also a movt down S1 and qty supplied ↓. The market adjusts until SS=DD. New equilibrium, E2: New price, P2 and new quantity, Q2 Lower revenue, ceteris paribus, lower profits. This happens in the short run SS0 P1 P2 E2 Do E1



• • •



Figure 1

No. of passengers

Closure of major airlines: => no of sellers in the market falls quantity of air travel supplied falls from SSo to SS1

At every price level, Supply shifts left

Price SS1 Po P2 A C DD0 SS0

Combined effect: The effect of both fall in demand and supply on quantity...
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