Question

Consider a tourism-dependent economy where the air travel industry is affected by two incidents which occur concurrently. One incident is the economy runs into a recession and unemployment had increased significantly. Another incident is the strike by pilots after the collapse of discussions between the pilot unions and the airlines management. Discuss with suitable air travel market diagrams the effects of these two incidents on the equilibrium price and quantity of the air travel market. Your diagrams should reflect the correct shapes of the demand and supply curves based on their price elasticities. (Note: you do not need to consider possible impacts of the COVID-19 pandemic in your analysis.)

Answer 1

In this case, both supply and demand will be affected.

As economy enters recession and unemployment goes up signiificantly, it will affect tourism demand as people will consume far less. This means the demand curve will shift to the left.

As airline workers strike, this will result in reduction of flights. That means supply will reduce- shifting supply curve to the left too.

While the final reuslt depends upon whether the decrease in supply was more or the whether the decrease in demand was more. Let us assume that both are equal.

This is shown below

The supply curve shiffts from S₀ to S₁. The demand curve shifts to left from D₀ to D₁. As both shift to the left, the output reduces from Q₀ to Q₁. The decrease in demand reduces the equilibrium price, but the reduction in supply cancels it out. So, at the end, the final price is same as earlier.