Question

Let's think about the market for air travel. From August 2014 to January \(2015,\) the price of jet fuel decreased roughly 47\(\%\) . Using the four-step analysis, how do you think this fuel price decrease affected the equilibrium price and quantity of air travel?

Short answer

The 47% decrease in the price of jet fuel from August 2014 to January 2015 led to an increase in the supply of air travel, as airlines could provide more flights at the same price or maintain the same supply at lower prices. This caused a rightward shift in the supply curve. As a result, the new equilibrium price of air travel decreased and the equilibrium quantity increased, making air travel more affordable for consumers and enabling more people to purchase flights.

Step-by-step solution

Identify the market and the factors affecting it

We are looking at the market for air travel and the main factor affecting it, in this case, is the price of jet fuel. A decrease in the price of jet fuel will influence the cost of providing air travel and, in turn, the equilibrium price and quantity.

Analyze the impact on supply

A reduction in the price of jet fuel means that the cost of providing air travel decreases for airlines. As a result, airlines are able to supply more flights at the same price or maintain the same supply at lower prices. In other words, there will be an increase in the supply of air travel, which can be represented by a rightward shift in the supply curve.

Determine the new equilibrium price and quantity

With the increase in the supply of air travel (rightward shift of the supply curve), the equilibrium price and quantity will be affected. Specifically, the new equilibrium price will be lower, and the new equilibrium quantity will be higher than before the fuel price decrease. This is because the increased supply will cause prices to fall in order to encourage more people to buy flights, and this drop in price will lead to an increase in the quantity of air travel demanded.

Summarize the findings

Using the four-step analysis, we can conclude that the 47% decrease in the price of jet fuel from August 2014 to January 2015 led to an increase in the supply of air travel, ultimately causing the equilibrium price to decrease and the equilibrium quantity to increase. In simple terms, air travel became more affordable for consumers, and more people were able to purchase flights as a result.

Key concepts

Supply and Demand

Supply and demand play a crucial role in determining the prices and quantities of goods and services in any market, and the air travel industry is no exception. In this context, the supply side refers to the airlines offering flights, while the demand side refers to consumers wanting to travel by air.

• **Demand Curve**: Represents the quantity of air travel consumers are willing to purchase at various prices. Generally, the lower the price, the higher the demand.
• **Supply Curve**: Represents the quantity of flights airlines are willing to provide at various prices. Typically, as prices increase, suppliers are willing to offer more flights.

The intersection of the supply and demand curves dictates the market equilibrium. Understanding this interplay helps us see how changes, such as fluctuations in jet fuel prices, can shift these curves and affect market outcomes.

Equilibrium Price

The equilibrium price is where the quantity of air travel supplied equals the quantity demanded. This is the price at which airlines will sell their flights, and passengers will buy them. When equilibrium is reached, there is neither surplus nor shortage of flights. However, changes such as a decrease in jet fuel prices can disturb this balance.

• **Impacts of Supply Changes**: If the price of jet fuel drops, it lowers the cost for airlines to operate flights. This increased supply pushes the equilibrium price downwards, making flights cheaper.

As airlines adjust their prices to align with the new cost structure, consumers benefit from more affordable ticket options.

Equilibrium Quantity

With changes in supply and demand, the equilibrium quantity of air travel will also shift. The equilibrium quantity is the number of flights available and sold at the equilibrium price.

• **Supply Increase Results**: As jet fuel prices decrease, airlines can afford to increase their number of available flights. This translates to a higher equilibrium quantity as the market adjusts.

As more flights become available at a lower price, more consumers opt to travel, resulting in increased bookings and a larger number of flights sold.

Price of Jet Fuel

The price of jet fuel is a significant determinant of airline operating costs. Variations in fuel costs directly affect airline profitability and fare pricing.

• **Cost Influence**: A decrease in the price of jet fuel reduces operating costs for airlines, enabling them to offer more competitive pricing.
• **Market Adjustments**: As operating costs decrease, airlines are incentivized to supply more flights, leading to adjustments in both equilibrium price and quantity.

This intricate relationship between jet fuel prices and air travel supply underscores the importance of monitoring these costs to understand market conditions and shifts in travel affordability.