COMMENTARY 4

Title: Medan city airlines compete to increase fares

Source: The Jakarta Post

Page number: N/A

Date of publication: 19th October 2007

Date of commentary written on: 20th October 2007

Section of the syllabus: Microeconomics

Word count: 749

The situation created by the poignant festival of Idul Fitri, builds a significant impact upon the market for airlines, in Medan, Indonesia. We are vividly able to delineate this in the misuse of the consumers’ excess demand, by the suppliers, i.e. the airlines. Thus reinforcing the need to apply price controls in order to keep the consumers interests into consideration also.

During non-holiday periods of the year, the market for airlines, would follow the Law of Demand, ceteris paribus, if the price of a good or a service increases then the quantity demanded would decrease, since the number of substitutes is very high in this market, for example: Lion Air, Adam Air, Garuda Airlines and many more.  Therefore if the price of air tickets increases of a particular airline, its demand will decrease as the consumers will divert to the substitutes. Furthermore this shows that the demand is fairly elastic, which means that if there is a small amount of increase in the price of the air tickets, the quantity demanded will decrease more than proportionately.

Join now!

This is seen in the graph below, where price increases (b) from P1 to P2 and leads to a more than proportional (a) decrease in quantity demanded from Q1 TO Q2.

However, through the article we can discern that during this holiday period of Idul Fitri, the demand for this service is extremely high and has become relatively inelastic, “the higher fares were not discouraging people from flying.” Since, all the airlines had increased their prices, leaving the consumers with no other option.

Elasticity measures the responsiveness of the quantity demanded of a good or a service if there is ...

This is a preview of the whole essay