Economics Example 1

Economics

Name:

Subject: Economics

Title: Qantas airlines

Introduction:

This paper focuses on the recent news regarding Qantas airlines , the airline has had some incidences that has questioned its safety in operation, these incidences have been due to technical problems that occurred with their aircrafts. In this paper we discuss the economic implications of these incidences especially the effect on supply and demand for the airline services by the consumers, in this discussion we assume that the airline industry assumes a free market economy and that there are rational consumers who demand the airlines services.

Economic concepts:

In this discussion we analyse the various factors that affect demand, we also analyze the various factors that affect the supply of goods and services in the market. We also apply the law of demand that states that as price increase demand declines and supply increases also that as demand increase prices increase. In this discussion we state that demand of goods and services is affected by the price, taste and preferences and prices of substitutes.

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Summary of the article:

According to world news dated 17th august 2008, Qantas airlines faced technical problems three times in less than one week, some the incidences highlighted by this article include the 25 the

July incident, the 29 th July incident and the 17th August incident. According to this article on 17

th

August a Qantas airline was delayed for 16 hours after technical problems, on 25 July the same airline had a mid air explosion that caused the pilot to make an emergency landing, on 29

th

July the airline experienced mechanical problems with hydraulic systems and had to land after take off.

From the above discussion it is evident that the airline has experienced technical difficulties that have questioned the airlines safety, many consumers have the view that despite the fact that the airline has not had any accident in the past there is a high possibility of a disaster in the future, this has an economic implication to the consumers, the government and the competitors in the industry.

Economic implication:

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From our above statement there will be changes that will occur in the demand and supply of airline services in the industry, the demand for a product or services will be determined by the taste and preferences, following these incidences the consumers will prefer services from other airlines and therefore the demand for the services by the Qantas airlines will decline, the following diagram shows the changes that will occur on the demand curve of Qantas airline:

The diagram shows the demand and supply curve of Qantas airline:

The above chart shows the demand curve and the supply curve of the Qantas airline, if we assume that the original demand curve was demand curve 1 then the change in preference by consumers will lead to a downward shift in the demand curve and the demand curve for Qantas airline will be at demand curve 2. The arrow shows the level of decline in quantity demand in the airline.

The competitors will benefit from this decline in the demand for services from Qantas airline, consumers will demand more services from the other airlines and this will cause a shift in the demand curve for Qantas competitors who provide the same services, the following diagram shows the demand and supply curve of Qantas competitors.

The diagram shows the demand curve and supply curve of Qantas competitor:

The above diagram shows the change in the competitors demand curve, as demand increase then the demand curve shifts upwards as shows in the diagram where the demand curve shifts from demand curve 1 to demand curve 2, despite the increase in the demand there is also an increase in the price, this is because the equilibrium price and quantity is determined by the point where the supply curve and demand curve intersect.

The increase in price will lead to other economic effects, as price increase the firms gain more profits and assuming that there are no barriers to entry into the industry there will be an increase in the number of firms in the industry, when more firms enter the industry then the supply

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increase. Increase in supply leads to a downward shift in the supply curve as shown below.

The following diagram shows the industries shift in supply curve following more firms entering the industry:

From the above chart it is evident that as more firms enter the industry then supply increase and this shifts the supply curve from supply curve 1 to supply curve 2, this however has an effect on the change in quantity and prices, the equilibrium price will eventually decline and the quantity produced will increase.

From the above discussion it is evident that the free market will self adjust and ensure that equilibrium price and quantity prevail, Qantas airlines will experience a decline in the demand for their services while its competitors will experience an increase in demand, increased demand will result into an increase in prices, these increase in prices will attract more firms into the industry assuming there are no barriers to entry. As more firms enter the industry then the supply increases and this shifts the supply curve downwards, a downward shift in the supply curve means that there will be a decline in the equilibrium prices and also an increase in equilibrium quantity.

Conclusion:

The above discussion shows the effect of changes in consumer taste and preference on the supply and demand, the discussion also shows how the market self adjusts both in the short run and the long run to achieve equilibrium, Qantas at first experiences a decline in the quantity demanded while its competitors experience and increase in demand, higher prices caused by the increase in demand will result into an attraction of firms into the industry and this increases

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supply, an increase in supply results into a decline in prices and an increase in quantity supplied and demanded.

Qantas can only improve on this problems by attracting more consumers and ensuring that they convince consumers that the airline are safe, this can only be done through informing the consumers and also ensuring that such incidences do not occur in the near future, Qantas competitors may take this opportunity to increase its market share by convincing consumers that their airlines are more safer than Qantas airlines.

References:

The West (2008) Qantas flight delayed after rudder concerns, Retrieved on 14th September,

available at htt p://www.thewest.com.au/aapstory.aspx?StoryName=506989

UPI (2008) Qantas jumbo jet grounded in NZ, Retrieved on 14th September, available at http:// www.upi.com/Top_News/2008/07/29/Qantas_hits_PR_turbulence/UPI-34321217381675/

The Age (2008) Drunken Qantas hostile ’causes mass evacuation’, Retrieved on 14th

September, available at

http://www.theage.com.au/articles/2008/08/11/1218306736483.html