Question

Explain why the derived nature of demand in the air transportation industry might account for the slim net profit margins.

Answer 1

Demand in the air transportation industry is derived demand. It means it is a demand caused by a demand for some other good or service. It can also be called induced demand because demand occurs as a result of addition to transport infrastructure which leads to increase in supply. Increase in supply reduces the price, hence increasing the demand. So there is a lot of infrastructural expenses and they operate at low prices in order to increase demand. This might lead to slim net profit.