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
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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...