With the aid of an equilibrium demand and supply diagram, briefly explain the following effects on the equilibrium price and quantity for the Kuala Lumpur -Singapore air route.

a) With the aid of an equilibrium demand and supply diagram, briefly explain the following effects on the equilibrium price and quantity for the Kuala Lumpur -Singapore air route.

i. More new airlines were joining the competition.

In this diagram the supply curve shifts to the right. It leads to a lower price and increase in quantity.The supply curve in a typical industry shifts fromStoS2. This decreases the equilibrium price fromP1toP2and increases equilibrium quantity fromQ1toQ2.

ii. Significant increase in the price of fuel surcharges by all airlines.

If the costs of production increase, businesses cannot supply as much at the same price and this will cause an inward shift of the supply curve. Higher fuel surcharges prices increase the cost of producing virtually every good or service. In the case shown here, the supply curve in a typical industry shifts fromS1toS2. This increases the equilibrium price fromP1toP2and reduces equilibrium quantity fromQ1toQ2.iii. More consumers wanted to fly to Kuala Lumpur but there was no increase in the supply of seats by the airlines.

If more consumers wanted to fly to Kuala Lumpur but there was no increase in the supply of seats by the airlines, which means that demand increases but supply does not increase. The demand curve will shift to the right, the equilibrium price will increase from P1 to P2, and the quantity demanded increase from Q1 to Q2. The supply curve will be unaffected.b) The Kuala Lumpur - Singapore route is monopolized by Malaysia Airlines and Singapore Airlines. Identify the new market structure assuming that Tiger Airways, AirAsia and Firefly were allowed to enter the market for this air route.The new market structure assuming that Tiger Airways, AirAsia and Firefly were allowed to enter the market for this air route is called monopolistic competition.c) With your answer in (b), answer the following questions:

i. Briefly describe two (2) characteristics of the market structure.

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.Monopolistically competitive markets have the following characteristics:Relative freedom of entry into and exit out of the industryMonopolistically competitive firms, like perfectly competitive firms, are free to enter and exit an industry. The resources might not be as "perfectly" mobile as in perfect competition, but they are relatively unrestricted by government rules and regulations, start-up cost, or other substantial barriers to entry. While some firms incur high start-up cost or need government permits to enter an industry, this is not the case for monopolistically competitive firms. Similar, But Not Identical Goods

Each firm in a monopolistically competitive market sells a similar product. Yet each product is slightly different from the others. The term used to describe this isproduct differentiation.This characteristic means that every monopolistically competitive firm produces a good that is a close, but not a perfect substitute for the good produced by every other firm in the market. As such, different firms can charge slightly different prices. This characteristic means that every monopolistically competitive firm produces a good that is a close, but not a perfect substitute for the good produced by every other firm in the market. As such, different firms can charge slightly different prices.ii. Suggest two (2) possible reasons that the route is difficult to compete with better in-flight services.

On the opposite end of the spectrum is perfect competition. Perfect competition is pretty much just a theoretical concept and never actually exists, but some industries can come very close to perfect competition. Some items sold on eBay approach perfect competition. Suppose people on eBay are selling a book for which there are many, many sellers selling identical editions of the same best-selling book. Adding in shipping and handling, you will find that people are all buying the book for almost the same price. An eBay seller could not sell the book for more than that price, and people will bid up the price to the going price. Each individual seller sells the book at a price set by the market and has virtually no power to set prices.

iii. Give two (2) likely examples that the airlines would compete with each other to gain a bigger share in the market.

A low-cost presence is estimated to cause a flatter price distribution, a higher degree of competitiveness, and a decline in the relevance of concentration, frequency, hubs, and capacity constraints in predicting market prices. This new breed of air carrier disciplines the incumbent major carriers that rely on market dominance to extract higher rents to support the higher cost basis of the hub-and-spoke networks these airlines use. The disciplining effect of low-cost carriers on the premium major airlines derive from hub airports may indicate that the higher cost basis of a traditional hub is no longer justified.

Moreover, the low-cost airline model, which is built around using a point-to-point network, should continue to be a successful model for new entrants. While it is unlikely that any major carriers will completely abandon their hub-and-spoke networks, the partial dismantling of those hubs, in the form of de-peaking, will continue. Market forces have and will continue to cause these structural changes. Furthermore, there are policies can accelerate this shift and the magnitude of the low-cost presence in the airline markets.

iv. Suggest two (2) possible impacts if a price war were to erupt when the budget airlines join in the competition.

Lower income consumers tend to reduce their air travel than high income consumers. Low income consumers are more likely to change their demand patterns during periods of economic recession due to low purchasing power and elasticity of price is high to them. Despite of travelling to long distance places with airplane, they reduce the costs by travelling to nearby places by land transportation for holidays.

In addition, airline industry such as AirAsia is oligopoly market due to only few firms are providing the air travel services to many consumers in the market. The barriers of entry are very high, one of the main barriers is high set up cost. Airline industry requires large amount of money to buy airplanes, hiring employees and advertising. Although AirAsia has the power to control over the price of air fares due to low number of firms in the market, their pricing strategy will still effect by the competitors because their customers may switch to another airline industry if the price is lower.

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