Factors That Determine Demand And Supply Economics Essay

Introduction

The market of our pick is the air hose industry in Malaysia. The chief commercial air hose companies in Malaysia consist of Air Asia, Malaysia Airline System Berhad ( MAS ) , Firefly, a subgroup of MAS, Berjaya Air every bit good as a few other smaller companies in East Malaysia.

Factors that determine demand and supply

Monetary value is a major factor that plays a portion in finding the demand and supply of air hose services. Flying is a luxury service, which means it is a signifier of transit that is costlier and is normally sought after by consumers with a greater sum of expendable income ( WebFinance, 2013 ) . Therefore, the demand for this service is elastic, intending it is really sensitive to alterations in monetary value.

Of late, we have witnessed a sudden addition in the figure of low-priced bearers in the last few old ages such as Air Asia and Firefly. However, research has shown there is a conflicting relationship between monetary value snaps these yearss. On one manus, riders are going more sensitive to monetary value, caused by the inflow of low cost travel, transparence brought on by the Internet and powerful competition from unregulated markets. On the other manus, riders are less sensitive to alterations in monetary value as the gross generated from ticket gross revenues become less important in the entire cost of the journey ( Smyth & A ; Pearce, 2008 ) . The two accounts for this are ; foremost, the constituents of the journey can be easy replaced, such as paths, manners, air hoses, etc. Therefore, the existent monetary value snap of air travel may be higher than the suggested monetary value snap of the overall cost of the journey. Passengers make a determination sing their flight finish by first weighing the monetary value of air travel and so merely the other costs incurred by the journey ( Smyth & A ; Pearce, 2008 ) .

Another factor that plays a portion in finding the demand for air hose services is the income of the consumers. Research has found that air travel income snaps were systematically positive ( Smyth & A ; Pearce, 2008 ) . This means that the demand for the good or service will increase when the income of consumers increase, proposing that consumers are willing to apportion a greater portion of their income to luxury disbursals such as air travel. In add-on, if the state has a developing economic system, the reactivity of the riders is greater, demoing that long-distance journeys have higher income snaps. This suggests that lower to middle income families are more inclined to short draw paths whereas higher income families prefer long draw paths ( Smyth & A ; Pearce, 2008 ) .

In add-on, the monetary value of related goods in the air hose industry besides affects the demand and supply of airplane tickets. An addition in the monetary value of a complementary good would ensue in a subsequent addition in the monetary value of airplane tickets, therefore take downing the demand for it. Another related good, known as replacements are two goods that can be used in topographic point of each other ( Mankiw, 2008 ) . If we define the market narrowly, so there are a great figure of available replacements, therefore doing the demand elastic. If we define it loosely, so aeroplanes have small or no close replacements.

Furthermore, the figure of purchasers in a market besides influences the monetary value of airplane tickets. A greater figure of purchasers in the market would ensue in an overall greater demand for airplane tickets and hence, an addition in the measure supplied by air hose companies.

Besides, clip period besides plays a function in act uponing demand snaps. The longer the clip period, the more elastic the demand, as consumers have a longer clip to set their behaviour to the monetary value.

Changes in Trends of Price & A ; How the Determinants Affect the Market Price and Quantity Traded

The monetary value of a peculiar good or service is derived by the interaction between supply and demand. The market monetary value that consequences is entirely dependant of these two really indispensable and of import constituents of a market. When purchasers and Sellerss alike both agree on a monetary value, an exchange of goods or services will happen, and this agreed upon monetary value will be called the ‘equilibrium monetary value ‘ .

When either demand or supply alterations, the equilibrium monetary value will alter. For illustration, cheaper fuel monetary values usually increases the supply of airplane tickets, with more merchandises being made available over a scope of monetary values. With no addition in the measure of merchandise demanded, there will be motion along the demand curve to a new equilibrium monetary value in order to unclutter the extra supplies off the market. Consumers will purchase more but merely at a lower monetary value. This is illustrated in Figure 3.

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In the instance of the air hose industry, the alterations of tendencies of monetary value of air travel tickets are determined by factors such as competition on path, seat demand, distance of path, place supply, and fuel monetary values. Harmonizing to the Wall Street Journal ‘s Market Watch, the mean monetary value of air menu for international flights went up 23 per centum between 2009 and 2010. Domestic ticket monetary values in the US besides rose 15 per centum over the same period. Monetary values are expected to go on increasing in the foreseeable hereafter. These fluctuations were blamed on the lifting monetary values of fuel and the planetary economic crisis that started in 2008.

Fuel cost is one of the biggest determiners of monetary value tendencies in the air hose industry. As the gross monetary value of rough oil rises, so does the monetary value of winging and the air hose ‘s costs. The general universe oil crisis is a immense determiner as oil is an thorough stuff. Oil is a complement of aeroplanes and hence there is a direct relationship between the oil monetary values and demand for air hose tickets.

Similarly a displacement in demand due to altering consumer penchants will besides act upon the market monetary value. In recent old ages at that place has been a displacement in demand for tourist air hose tickets to Japan, which was due to the recent lay waste toing temblor. A diminution in the penchant for air hose tickets to Japan switch the demand curve inward, to the left, as illustrated in figure 4.

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Another factor that affects air hose ticket monetary values is the planetary economic lag. Since companies do n’t do so much gross as earlier, they have to cut down the costs in order to achieve the same net income. However, it ‘s non merely the cost facet that causes a diminution in air travel, but besides the fact that due to an economic lag, there is non so much concern traveling on any longer. This can be seen during the Asiatic Financial Crisis of the late 90 ‘s, whereby it brought down the figure of people going to and from Asiatic states.

How and why the authorities intervenes

The authorities intervenes in the air hose industry by commanding the finishs of the flight paths. Air Asia and Malaysia Airline Services ( MAS ) , the most well-known air hose houses in Malaysia have different flight paths as the assorted finishs of these houses need the support from the authorities to wing to a peculiar state. For case, MAS with the support of the Malayan authorities will near Singapore Airlines to make a direct flight from Kuala Lumpur to Singapore as the demand is high. Hence, due to the strong diplomatic tie between the two authoritiess, Singapore air hoses will hold as it helps both states ‘ economic growing every bit good as their touristry industry. This applies to other paths from different states every bit good.

The authorities besides implements revenue enhancements in the monetary value of plane tickets. In general, revenue enhancement is implemented to deter a certain market activity. However, in this industry the demand of winging is high. Hence, the little per centum of the revenue enhancement execution done by the authorities will non do much difference in demand but, consumers ever think at a border. They make determinations based on monetary value. As this industry is elastic, consumers tend to look for other close replacements which are comparatively inexpensive.

To step in in a market where there is ground to believe that market monetary values are slightly unjust to purchasers and Sellerss, the authorities may take to implement certain policies to stabilise monetary values or convey them to a desired degree. These policies are about ever decently planned by professional economic experts with the purpose of making the optimal economic system.

Policies enacted by the authorities to command monetary values by making a monetary value ceiling would promote more people to take advantage of today ‘s technological progresss. An illustration would be rent control policies by puting monetary value ceilings on the rent that landlords are allowed to charge. Through this policy, the awaited end of doing lodging more low-cost to assist the hapless was achieved. However, it is frequently the instance that policymakers do non accomplish the expected end. Introducing a monetary value ceiling would be attractive but it does non vouch an addition in gross revenues.

Decision

The air hose industry in Malaysia is a dynamic industry that is influenced by the assorted factors of demand and supply in different grades. There is no difficult and fast regulation when it comes to analyzing each factor as this industry is of all time germinating and turning.