Due to the terrorist attack of 9/11, there were many economic effects - recession and an increased fear of flying would lead to a decrease in demand whereas the subsequent closure of some of the major airlines of the world would lead to a decrease in supply. Recession refers to negative economic growth that affects consumption since economic growth is the key determinant of changes in average household income. Hence, this essay aims to discuss how recession and closure of major airlines affect the demand and supply and thus the equilibrium price and output of the market for air travel.
Negative economic growth or economic decline causes a decrease in demand as it influences the average household income causing a decrease in level of income and wealth. Income refers to the earnings per time period. A fall in income due to economic decline leads to falling ability to purchase goods, in this case air travel ticket or packages. Decreasing income also leads to fall in disposable income for travelling. Thus, demand falls as a result.
Economic decline also leads to a decrease in economic activities and hence business activities. With decreasing business activities, the need for business travels fall, contributing to the decrease in demand for air travel, shifting demand curve leftwards.
In addition, in the times of poor economic outlook or situation, the ease of acquiring credit may fall due to the need to maintain the financial stability. Hence, consumer may find it harder to borrow to finance expensive items, including holidays. Thus, demand for air travel may decrease significantly as well. Stringent financing rules that discourage borrowing also contribute to the fall.
On the other hand, closure of some of the major airlines would have a significant impact on the supply for air travel, especially when major firms are usually responsible for a significant proportion of the supply. Closure of major airlines decreases the number of firms in the industry, shifts the supply curve leftwards, decreasing supply. This can also be caused by a decrease in size of existing firms as it decrease the total capacity of the airline industry.
Terrorist attacks causing major closures and financial crisis can be considered as supply shocks, disrupting and reducing the supply of air travel, shifting supply curve leftwards.
However, the extent of decrease in demand and supply may differ, resulting in differing price and output equilibriums.
[Insert diagrams of market of air travel to show the difference in the fall of supply and demand causes price and output equilibriums to shift differently]
If the supply decreases to a greater extent since it involves the closure of major airlines, the price increases as supply curve shifts leftward to a larger extent than the demand curve falling. However, if the decrease in demand is a larger extent compared to the decrease in supply fuelled by fear of flying, the price decreases instead.
In conclusion, the extent of shift of demand and supply curves eventually determines the equilibrium price and output. In the long run, a new equilibrium may be reached as the economy recovers and consumers regain their confidence. Hence, this change in price is a short run outcome for the market for air travel.
JC Economics Essays (H2 'A' Level Economics Essay): economics tutor's comments - There are many economics examination questions that make reference to contemporary world events, and 9/11 is one of the major events in the world that students should know about. The focus of this essay question is, however, about the market for air travel, and in particular the economics concepts of demand and supply. How are the factors of demand and supply related to the scenario described? Fundamentally, economics students should be able to link the theoretical model of demand and supply to economics questions during examinations. This ability to link real world examples and context to economic theory is a real skill that should be developed. The usual questions apply - how would you improve this essay to make it more developed? How would you further the arguments? Think of how you would write your economics essay in response to the question. If you are able to recall the factors affecting demand and supply, how would you link those to the concepts? What revision do you need to make this essay excellent, or better? Special thanks to student contributors for this sample essay.
