Emily Knudson
Professor Joyal
Economics
April 20 2010
Economics of the Airline Industry
The economics of our nation control everything that we see and do in our daily lives. Free trade determines what cars you are able to purchase, the rate of inflation determines how much you pay for steak at your local grocery store, and employment opportunity decisions are often made by the incentives associated with them. Often, people do not evaluate how the decisions they make in their personal life affect the economics of his or her life and if enough people make the same bad choices, the economy as a whole is affected. This was exemplified when people entered into adjustable rate mortgages that they were unable to afford when the rate adjusted. This was also a bad decision on the behalf of the mortgage brokers. Economics are very complex and can be more easily understood when you view how economics relate to and affect a particular industry. Most people have had one experience or another with the airline industry; let’s take a look at it from an economic view by evaluating price elasticity as it relates to supply and demand, externalities, wage inequalities, and monetary fiscal policies.
Have you ever wondered why flights on certain days and during certain times are less expensive than others? This is related to price elasticity and supply and demand. Price elasticity measures the sensitivity of consumers to changes in prices. Whereas, supply and demand affects the cost of goods and services in relation to the amount available and how much the good or product is being requested. As a normal reaction, people purchase fewer goods or services when the price of the good or service increases and they purchase more when the product decreases. As the costs associated with flying rise, fewer people are flying. In the airline industry, flights are less expensive on days and in times in which the demand for a flight is low and the prices are higher when the demand is higher. In searching for a flight, you will find that the costs of flights during the time that people are normally sleeping are less expensive than the price of a flight during more convenient hours. You will also find that certain days will have lower prices associated with them, such as September 11th. Although such days and times are not as convenient as we would like, flying at alternative times is an economically good decision for a personal budget. Due to the fact that customers react negatively to the increase in flying rates, over the margin of one percent, flying is an elastic service. This same theory proves itself true in our lives. If a new entertainment game system is introduced into the market, the price is initially very large. A few months later, a new system is introduced. The price of the prior system is then reduced to lure more customers. Most likely, the price of the older game system decreased by more than one percent. This would mean that the price of the old game system is elastic.
