Question

Consider a tourism-dependent economy where the air travel industry is affected by two incidents which occur concurrently. One incident is the economy runs into a recession and unemployment had increased significantly. Another incident is the strike by pilots after the collapse of discussions between the pilot unions and the airlines management. Discuss with suitable air travel market diagrams the effects of these two incidents on the equilibrium price and quantity of the air travel market. Your diagrams should reflect the correct shapes of the demand and supply curves based on their price elasticities. (Note: you do not need to consider possible impacts of the COVID-19 pandemic in your analysis.)

Answer 1

One incident is the economy runs into recession and unemployment had increased, it must have reduced demand of air travel.

Strike by pilot reduce the supply of air travel as without pilots they cannot fly planes.

Economy in the graph below started at point A.

Both of these factors combined (reduced demand as well as supply) will keep price same as intial level while reduce air travel from Y to Y2.