Note: This (theoretical) sample economics essay shows you how to systematically and methodically deal with Multi-Part, Complex Economics Essay Questions with Several Areas of Discussion to Address
Essay:
To begin with, it is important to identify that the recession would have led to a drop in demand for air travel, while the closure of some of the major airlines would imply a fall in supply of air travel. Therefore, this essay will talk about the different permutations of a simultaneous fall in demand and supply, and their effects on the price and quantity output of air travel, with the aid of a diagram. Additionally, it will also be analysed in context why both the demand and supply of air travel had fallen.
Although both the demand and supply of air travel had fallen, it is important to note that relatively, if the demand had fell more than the supply and vice versa, the resulting price of air travel will differ.
[Insert diagram on fall in supply > fall in demand]
[Insert diagram on fall in supply < fall in demand]
From the first diagram, it could be seen that if the drop in supply was greater than the drop in demand, price rises, while quantity falls. However, in the second diagram, if the drop in demand was greater than the drop in supply, both price and quantity falls. These hence summarises the varying effects of a fall in both demand and supply on the market for air travel.
Moving on, it will be analysed in context why did the recession and the closure of major airlines lead to a fall in demand and supply of the air travel.
Firstly, it has to be taken into account that the demand for air travel is a derived demand, derived from the demand for vacations and business-related trips. In the case of a recession, the world’s income falls, thus significantly reducing the demand for vacations. Furthermore, with a recession, business activity slows down in tandem with the slowdown of the economy. This implies a fall in demand for business trips as well. Together, the fall in demand for both vacations and business trips means that the derived demand of air travel falls as well.
Additionally, the closure of some major airlines implies a reduction in the number of operating firms and hence the number of available flights. This ultimately leads to a fall in the supply of air travel.
In conclusion, for the first part of the question, the recession and closure of major airlines affected the air travel’s market via a fall in both demand and supply of air travel. However, there are varying effects depending on the relative extent of the fall of demand and supply.
The second part of the question requires the analysis of the extent of relevance of the various concepts of elasticities in explaining the effects of the worldwide recession, the increased fear of flying and the closure of some of the major airlines on the airline industry. Therefore, this part of my essay will explain the various concepts of elasticities in context, before concluding with some limitations of the use of elasticities.
Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its prices, ceteris paribus. It is calculated by taking the percentage change in the quantity demanded of the good over the percentage change in its price. Therefore, it affects the gradient of the demand curve. The steeper the slope of the demand curve, the more price inelastic is the good. In context, the fall in supply of air travel arising from the closure of some major airlines will result in a rise of price of air travel. However, since there are no close substitutes for air transport (as the speed of other forms of transport are not comparable), especially for long distance travel, the demand for air travel is likely to be relatively price inelastic. Hence, the rise in price of air travel will lead to a less than proportionate fall in quantity demanded for air travel.
Income elasticity of demand measures the responsiveness of the demand for a good to a change in income, ceteris paribus. It is calculated by taking the percentage change in demand for a good for a given percentage change in income. For normal goods, income elasticity of demand is positive as when income increases, demand for the good increases and vice versa. Normal goods could be further divided into necessities and luxury goods, where the former’s demand rises less than proportionately with a rise in income, while the latter’s demand rises more than proportionately. There are also inferior goods, where demand of the goods drops with a rise in income.
[Insert diagram on falling demand curves]
In context, vacations are largely a luxury good for most households, thus they are income elastic. Thus, with the recession and thus fall in income, the demand of vacations is likely to have a more than proportionate fall. On the other hand, business trips are more likely to be unable to be put off in the short run, thus they are more income inelastic and hence demand is likely to fall to a smaller extent when income falls. However, in the long run as business activity slows down, business trips will not be required, thus they may become income elastic. Therefore, in the long run, the demand for air travel is likely to be income elastic, implying a more than proportionate fall in demand, with a fall in income arising from the recession.
Price elasticity of supply measures the responsiveness of quantity supplied of a good to a change in its price, ceteris paribus. It is calculated by taking the percentage change in the quantity supplied of the good over the percentage change in its price. Therefore, it affects the gradient of the supply curve, the steeper the slope, the more price inelastic is the supply. In context, the fall in demand for air travel results in a fall in price of air travel. However, since most flights have been scheduled months in advance so planes will fly even if demand falls, thus in the short run supply of air travel is rather price inelastic. This means that there will be a less than proportionate fall in quantity supplied of air travel with a fall in price. However, the same does not hold in the long run. In the long run, airlines close down if subnormal profits are incurred; hence rendering the supply of air travel price elastic. This leads to a more than proportionate fall in quantity supplied with a fall in price of air travel.
Lastly, cross elasticity of demand measures the responsiveness of demand for a good to change in price of another good, ceteris paribus. It is calculated by taking the percentage change in demand for the good for a given change in price of another good. Substitutes have positive cross elasticity of demand while complements have negative cross elasticity of demand. Unrelated goods have zero cross elasticity of demand. Also, the magnitude of the cross elasticity of demand suggests how strong the goods are as substitutes or complements to each other. However, cross elasticity of demand is not relevant in this context as the preamble did not mention a change in price of related goods.
In conclusion, with the exception of cross elasticity of demand, the various elasticity concepts are largely relevant in explaining the effects of the events on the airline industry. Despite this, there are certain limitations. Firstly, elasticity concepts will not be suitable to measure the fall in demand caused by the fear of flying, since such change in preferences against air travel is intangible and unquantifiable. Hence the relevance of such concepts to explain the effects are largely limited since the fear of flying most likely accounts for the large part of the fall in demand. Furthermore, since elasticity figures can only be estimated based on past data, it may be inaccurate to use such to foresee the effects of current events since economic conditions would have changed.
JC Economics Essays - H1 and H2 standard 'A' Levels Economics Essays - tutor's comments on this essay - Basically, there are times in an examination when the examiners ask multiple parts in one single question. This essay simulates combining two essay parts (usually a part (a) and a part (b) essay) into one essay, and the best way to address it is to imagine that it is indeed two parts - and answer each part accordingly. There are several other essays on this site that are similar to this one, but are in the part (a) and part (b) version, and the style would be different for each. Think about how you could improve on the method suggested above. Special thanks to A.G. for her contribution, as well as the econs students behind this very impressive work.
