Microeconomics Basic Concepts

1. Describe two examples of important things that financial planning skills can help you do, and explain why these things are important to you personally. (4-6 sentences. 2.0 points)

Discussion 2, Tariffs and Quotas. Who gains and who loses from a tariff? How do the effects of tariffs differ from the effects of quotas? If you were a small country, what would you rather utilize?

Rising fuel prices has a huge impact on the airline industry. In an article published by the New York Times in 2007, oil prices were hovering ‘near $100 a barrel’ which caused the International Air Transport Association (IATA) to ‘slash’ their predicted profits for 2008 from ‘$7.8 billion to $5 billion’ (Clark, 2007). In 2008 high fuel prices were ‘dominant factor’ in the losses that faced the industry, and continued to same effect in 2009 (Dunn, 2009). Diagram 2 shows how fuel price has increased and fallen over the last 5 years.

Economics investigates the decisions of people, firms, countries, and any other ‘economic agent’- it is the study of human behavior and choices. Although economics encroaches into many disciplines and addresses a wide variety of problems ranging from stimulating economic growth to finding evidence of cheating in sumo-wrestling, they cannot pretend that they can understand human behavior and can simply solve all the problems of the world alone.

If the price of airfare increases the demand for air travel will fall. Less people will be able to afford the higher prices for air travel.

The supplier power in airlines is dominated by the world’s two largest aircraft manufacturers are Airbus and Boeing. The competition between the two manufacturers is neck to neck but that would prove to be a boon for Emirates as the prices would not rocket through the ceiling. A study shows that Emirates holds 93 Boeing aircrafts and 83 Airbus units (Planespotters, 2009). In 2007, Emirates purchased 81 Airbus flights, to extend it services- however, they chose Airbus over Boeing as the latter failed to deliver its latest aircrafts on time and moreover, Airbus had quoted a good price (Barryl, 2007). The changing oil prices also have an adverse effect on the aviation industry. In a nutshell, the bargaining power of suppliers is high.

3,4- The Airline industry and the market The airline industry is large, specially in the United States, mainly due to the “ Deregulation” of the industry. In 1938, the Civil Aeronautics Board was created to control the growth of the air transportation industry. This board had the authority to control entry, exit, prices and methods of competition. In the late 1970 this structure was found inefficient and in 1978 deregulation took place. Due to the deregulation of the industry competition intensified, prices dropped, and the number of people travelling increased. Many new companies emerged and regional airlines saw deregulation as an opportunity to expand. Due to the rise in competition, by 1986 mergers started to take place and in 1987 64.8% of the market was controlled by the four largest airlines. The demand for air travel is determined mainly by price, studies revealed that half of the leisure travellers and on quarter of business travellers did not have a preference for a particular airline, which means that prices determined the

Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue. One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket close to the departing date, define this as a risk factor because they need to make up for all unsold seats. A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket price is higher with one airline than the other, the customer interprets this as being an excessive cost. The demand is greatly affected by the external market

Microeconomics is the economic influences that impact at the micro, or firm, rather than macro level. The study of this subject is one that is highly valuable for any studying business with the provision of knowledge that will increase understanding of different influences and support the decision making processes. With the knowledge gained, along with the skills in applying that knowledge developed through class work and exercises for the different modules, there has also been the development of increased confidence, both personal and in the theories, in using the relevant concepts and tools in a practical setting.

The growth of airline industry in any country is directly proportional to its GDP growth; the greater the business activity, the more air travel and the higher the GDP of the country. The demand

Price control if not properly managed could be disastrous to the economy. It maynot only lead to higher prices in the long-run, but can even disrupt an industry. If pricesare not allowed to vary in response to greater risk, cost of production, and increasing costof staying in business, not enough producers would be encouraged to supply the product.

Throughout centuries, the United States of America has evolved and become more diverse, which has generated various changes in society as a whole. In consequence, such changes have led to numerous economical situations. Some situations required major changes and others required minor changes in the market economy. In either case, the price value of goods and services has continued to increase with time. So why has the cost of goods and services increased? In order to acquire some sort of explanation, one must examine the economic market and its process. First, consumers needs to apprehend that economics is an extremely important aspect of the today’s society, especially, since it aids in the allocation of limited resources. As well as, acknowledge that supply and demand are aspects and fundamental concepts of economics, which are considered the foundation of a market economy. In fact, the association between demand and supply underlie the forces responsible for the allocation of resources. Perhaps, by studying the behavior of individuals, their demands and wants, along with the operation process of the market, can one comprehend and accept the reasoning behind high prices. Therefore, given the importance of supply and demand and its impact on the market economy, one will elaborate on the law of supply and demand. In addition, one will discuss how these fundamental concepts of economics apply and impact the price value of Airline tickets.

Another contributing factor in the increased cost of air travel is the lack of competitors. The airline industry has been a struggling industry for years. The only way for some of these airlines to survive was through mergers. Fewer suppliers in the marketplace, translates to more pricing power for the airlines and an increase in airfares.

The cut in interest rates will shift the aggregate demand curve to the right. The reduction in the interest rate will reduce the cost of borrowing for households and businesses. These lower rates should encourage households and businesses to increase their level of consumption and increase the level of investment spending in the economy.

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. A focus of the subject is how economic agents behave or interact and how economies work. A given economy is the result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions.