Microeconomics Basic Concepts

Economics Economics is a study of how people choose to allocate their scares resources to produce, exchange and consume goods and services to satisfy unlimited wants. As in this article, fuel surcharges increases as the price of fuel increases. Economics is also a study of choices made by individuals, firms, governments and society as a whole which helps us to understand economic issues that we read and hear about.

In this article, people have a choice whether or not they want to pay more for air tickets as although airlines are making profits, it can still lead to higher fares. 1. 2 Scarcity A good or service is scarce if the amount people desire exceeds the amount available at zero price. Because we cannot have all the goods and services we would like, we must continually choose among them. Because goods and services are produced using scarce resources, they are themselves scarce and therefore are only available at a price.

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Since fuel is one of the scarcest natural resources in the world, the price that it will be available at would naturally be higher and thus causing air tickets to be more expensive. 1. 3 Opportunity Cost Due to scarcity, choices have to be made and individuals make choices based on their won self-interest which are very often influenced by economic considerations. This leads to having opportunity cost, which is the expected benefit from the best alternative that is forgone.

This proves why the airlines would want to merge as although by merging, they forgo the opportunity of earning more in the short run but instead get long term stability of the airline as merging would mean that competition is significantly reduced. 2. Demand 2. 1 Law of Demand The Law of Demand states that an inverse relationship exists between price and quantity demanded of a good, sisters Paramus. Thus when price increases, the quantity demanded of that good decreases, vice versa.

This shows that as prices of air tickets continue to increase, there will be a drop in the quantity demanded of it by consumers. 2. 2 Substitution Effect The Substitution Effect states that as prices of goods increase, buyers will reduce their purchase of the good in question and buy more of an alternative good that is relatively cheaper but since there is a trend of airlines merging to reduce each other’s competition, it results in fewer options for the traveler as they would have seer or no alternative choices that are relatively cheaper and thus they have to pay higher fares for the air tickets. . 3 Income Effect The Income Effect states that as prices increase and with the same amount of income, consumers are able to buy less of a good as their real income has fallen thus, this would result in the consumers’ ability to buy air tickets to drop and thus causing the quantity demanded for air tickets to also decline. 2. 4 Determinants of Demand (Money Income) Microeconomics Basic Concepts By spouses and if money income decreases, there would be an decrease in demand for normal odds, showing a direct relationship between money income and normal goods.

However, if money income decreases, demand for inferior goods increases and vice versa, showing an inverse relationship between money income and inferior goods. Thus, should money income of consumers increase, there would be more demand for airlines but should the money income of consumers decrease, they would have increased demand for inferior goods like going to Malaysia via bus. 2. Determinants of Demand (Expectation of Consumers) Should consumers expect the price of a good to rise in the future, they would buy ore now before it actually rises or when they expect their money income to rise in the future. Thus should consumers see that air tickets’ prices are going to rise higher in the future, they would buy more now which would lead to an increase in demand for air tickets today. Also, shown in the article about Iota’s optimism about last quarter’s slightly higher economic growth and lower fuel prices than expected thus the factor price is lowered due to the fuel being a resource.

This would mean higher economic growth for the airline companies and with higher economic growth, it mans expectations and thus the demand for airline tickets will also increase due to this fact and thus the supply will increase and if the demands increase is more than the supply increase, prices will go up as demand is more than supply. 3. Supply 3. 1 Law of Supply The Law of Supply states that a direct relationship exists between price & quantity supplied of a good, sisters Paramus.

When price increases, supply increases and vice versa. This is due to the fact that producers are more willing to sell greater amounts of a good at a higher price as it is relatively more profitable to produce, compared to there goods. In this case, due to the increase of prices of airline tickets and the possibility of it continuing to increase, airline companies are merging together to not only reduce competition but when they merge as one airline company itself, they are able to sell more airline tickets. . 2 Determinants of Supply (Factor/Resource Price) If higher cost of production were incurred and if the producer were given the same price, they would be less willing and able to sell at all price levels or that a higher price level may be charged at every output level. This is so in the case as, for the airplane to fly from one country to another, it requires fuel which is increasing in price and therefore, due to that a higher price is being charged at every output level. . 3 Determinants of Supply (No. Of Sellers in the Market) If the number of sellers in the market increases, there would be an increase in supply of the airline tickets and that would mean that the prices for airline tickets would decrease but however in this case, airline companies are merging, which means that the supply for airline tickets by different companies would decrease, causing an increase in price for it.