help me pls about economics

Question

The Case:
Airline industry is a large and growing industry. It accelerates economic growth, world
trade, international investment and tourism and is therefore, central to the globalization.
The airline industry is always dependent on prevailing market conditions. There are lots
of factors which affect the passenger’s demand for air line’s travel; increase in its prices
of tickets, oil price, and terrorist throughout the year. Furthermore, market competition
and other modes of traveling (substitutes) in market like train, car etc. also affect demand
of airline tickets. If the demand and supply equations for airline tickets are:
Qs= 200+800P
Qd=2000-400P
Requirement:
a) Find the market clearing quantity and price of airline tickets, also show the
equilibrium condition graphically.
b) Find out the price elasticity of demand and price elasticity of supply of airline
tickets at equilibrium price and quantity.
c) What will be the effect on the equilibrium level of airline tickets if ticket prices
increases due to high fuel prices. Illustrate graphically

Answer 1

a) We need to set supply equal to demand to solve the equation. We have:

Qs= 200+800P supply
Qd=2000-400P demand

 

So Setting Qs=Qd and solving for P (Price) we get 200+800P=2000-400P so now collect terms and solve for P, the equation becomes 1200P=1800 divide both sides by1200 and the market equilibrium price is 1.5. To solve for the market clearing equilibrium quantity we can substitute the price that we just solved for back into the supply or the demand equation, we can use either equation as because at equilibrium Qs=Qd=Q. Here we will substitute it into the supply equation we have:

Q=200+800(1.5) so Q=1400. If we would like to check ourselves we can substitute it into the demand equation and we should get the same answer:

Q=2000-400p so Q=2000-400(1.5)=1400

Graphically we have an upper sloping supply curve and a downward sloping demand curve, on the graph where P is the vertical axis and Q is the horizontal axis, where the two lines intersect should be the point (P=1.5, Q=1400)

 

b)Supply and Demand Elasticity:

The price elasticity is given by the following equation:

Ep = ((Q2 - Q1) / (Q1)) / ((P2 - P1) / (P1)), it is important to note that the price elasticity is not constant across the supply and demand curve and the question has asked us to solve for the elasticity at the equilibrium so we will examine the price elasticity of supply and demand at equilibrium for a 1 unit change in price. For the price elasticity of supply we have our first two points Q1=1400 and P1=1.5 and we are assuming a 1 unit change in price so we have P2=2.5 so we need to solve for Q2. Using our supply equation Qs= 200+800P supply equation Qs= 200+800P supply substituting in P=2.5, so Q2=200+800(2.5) so Q2=2200, using out equation Ep we now can substitute all of our variables into the equation and we have Ep = ((2200 - 1400) / (1400)) / ((2.5 - 1.5) / (1.5)) which is about 0.5714/0.6667 or 0.8571 students should note that the elasticity is always unitless so there are no dollar signs or special units for the number and the price elasticity of supply is generally positive.Now for demand we do the same thing again we have Q1,P1,P2 which are the same as above and we are solving for Q2 using the demand equation Q2=2000-400(2.5) so Q2 is 200. Using the same Elasticity equation: Ep = ((Q2 - Q1) / (Q1)) / ((P2 - P1) / (P1)) and substituting we get  Ep = ((200 - 1400) / (1400)) / ((2.5 - 1.5) / (1.5)) which gives us Ep=(-0.8571)/(0.6667) or -1.28565. Demand elasticity is usually negative there are some exceptions like Giffen goods but we won't discuss those here. Also because the absolute value of the demand elasticity is greater than 1 we say that the good is elastic.

 

c) An increase in the price of airline tickets should cause the supply curve to shift back or up without changing the slope without changing the demand curve. The result is a fall in the equilibrium price and a rise in the equilibrium price.