Chapter 3: Problem 5

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

Expert verified

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.

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