Demand an increase in the supply, it
Demandand supply:http://www.straitstimes.com/singapore/more-economy-seats-on-sias-superjumbos Analysis:Economics:Economics is the social sciencethat studies the economic tendencies, or what is likely to occur whenindividuals make certain choices, and how it influences the production,distribution, and consumption of goods and services in a certain marketstructure. Demand and Supply:Demand constitutes the quantitythat is being demanded of the amount of product individuals are willing topurchase at a certain price. This relationship between the price and quantitydemanded is known as the demand relationship.
While supply refers to therelationship between the quantity supplied at a certain price, in other words,how much market is willing to offer. Applying Economics Concept toDemand and Supply to the article: Demand:Based on the new release ofAirbus A-380, it is inferred that SIA is trying to appeal to the tastes andpreferences of consumers as an attempt to increase the low demand for premiumair travel. However, it is noticeable that this strategy might not work due tothe many alternatives of air lines for consumers to choose from. As such,despite the SIA’s attempts at trying to increase demand from the consumersthrough an increase in the supply, it is an inefficient strategy; consumershave the power of choice and preference to not purchase air tickets from SIA.Inaddition, SIA is said to charge “at least 20 per cent more than rivalslike Cathay Pacific, Emirates and Qatar Airways.” The price of substituteslike cathay pacific is lower, as such, there is a resultant increase ofquantity demanded for cathay pacific, this in turn leads to a decrease indemand for SIA. Since there are a great number of substitutes, in the form ofcathay pacific and the like, demand for SIA flight tickets is more priceelastic, and that the improvements made by the SIA does not aid in moving SIAout of this disadvantageous situation.
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Different customers havedifferent taste and preferences for the airline company they would prefer totravel with. For example, some customers might prefer SIA over othercompetitors, due to their safe track record; or perhaps out of habit. Likewise,some customers might also prefer other airlines where factors such as qualityof service, comfortability of flight all factor into which airline they ratherchoose to travel with. Supply:Ceterisparibus is a Latin phrase that means”other things being equal.” In economics, Ceteris paribus is theassumption that all the other variables except those under immediateconsideration are held constant. As SIA charges 20% more than its competitors,this would lead to an increase in the quantity supplied of airplanes, ceteris paribus.As a result of the changes in the progress of technological advancements, thereis now a greater ability to produce many Airbus A-380s, that caters to thedemands of the consumers.
With more seats available, the supply of the SIAflight tickets would increase. Conclusion: In accordance with the newrelease of the Airbus A-380 by the SIA, the supply curve will shift rightwardsand demand curve will shift leftwards. As a result, the equilibrium price andequilibrium quantity would increase. AnalysisSingapore’s technological advancements and high standard of living has resultedin more Singaporeans travelling out of the country.
With many budget airlinesentering the Singapore aviation market in the recent years, the demands fortickets has increased over the years. With the increase in sales of airlinetickets, the market has been more competitive than ever. Airline tickets areinto 2 different categories, long-haul and short-haul. The categories arefurther divided into sub-categories which are business and leisure.
Theairfares for long-haul business trips market are usually more priceinelastic while the airfares for short-haul leisure trips market are usuallymore price elastic. Long-Haul Airline tickets for business purposes are price inelastic due to somedeterminants of price elasticity of demand. The determinants are theavailability of substitutes, habit and it being a necessity instead of aluxury.
Thus, consumers will be less responsive to the price changes. When agood is price inelastic it means that the percentage change in price is morethan the percentage change in quantity demanded. An increase in price of aninelastic good will result in a lower percentage decrease in the quantitydemanded, so less consumers will be affect by the price change and the amountof consumers will not change as much. There are very little budget airlinesselling long-haul tickets so there are very little substitutes available forbusinessmen to consider, making the airline tickets more price inelastic. Mostbusiness trips are also habitual, making the demand for long-haul business ticketsmore price inelastic. Travelling for businessmen is a necessity and not aluxury, so the demand for the tickets will be more price inelastic.
Hence,Long-Haul airline tickets for business purposes are more price inelastic asconsumers are not likely to respond to the price change.Short-Haul Airline tickets for leisure purposes are price elastic due todeterminants of price elasticity of demand. The determinants are availabilityof substitutes, proportion of income spent on good and it being a luxury insteadof a necessity. For short-haul trips, there are many budget airlines to buytickets from making the demand for short-haul airline tickets more priceelastic. Since the tickets are bought for leisure purposes, the consumer willtend to buy tickets for his family as well. This increases the proportion ofincome spent on the airline tickets, making the demand of the good more priceelastic. Travelling for leisure purpose is a luxury and not a necessity astravelling overseas is not needed for everyone.
Since short-haul airlinetickets for leisure is a luxury, its demand will be more price elastic. Hence,short-haul airline tickets for leisure is more price elastic as consumers aremore sensitive to the change in price.ConclusionAirline tickets can be price elastic as well as price inelastic dependingon the consumer’s purpose of travel and whether the flight is long-haul orshort-haul. AnalysisIn SIA, the fixed resources are the airplanes, while the variable resources arethe facilities added in the airplanes and employees hired to operate the airplanes.
The airplanes in SIA have not been upgraded since 10 years ago. Hence, thefacilities inside the airplanes are outdated and old. This caused a short-runsituation. Thus, this might have caused a stagnation in their revenue due tothe similarity in other airlines. This is also due to the law of diminishingreturns.
As more and more units of variable resources like employees are hired,the marginal product will ultimately decline. This means that the aircraft willnot produce as much revenue in a short run. Moreover, the cost incurred for theemployee’s salaries will continue to increase over the years due to rising costof living. This means that the expenses increase but the revenue did not, hencecausing the profit to decrease over the years. With the upgrade of the facilities in A380 aircraft, it is expected in thearticle that the yields will increase in the premium cabins. Moreover, in theeconomy cabins, the increased seat density would cause a higher revenue even ifthe yields stays the same. This is because, people are anticipated andattracted to the new facilities that A380 brings. This is a long-run situation.
As the output which is the plane changes, averagecosts will initially decline because of the economies of scale, while the morespace in the plane allows for a more extensive division of labour. Hence, thissituation will maximise profits.ConclusionTo maintain this situation, SIAshouldOligopoly https://www.
channelnewsasia.com/news/business/singapore-airlines-plans-wide-ranging-initiatives-to-reclaim-9285762 Summary of article:Singapore Airlines (SIA) hasplans to pursue a three-year-plan to reclaim its market leadership. Throughthis, SIA hopes to “continues to be a leader in customer service, and toclaim market and financial leadership once again”. Of which, SIA has”handed two of regional arm SilkAir’s routes to budget carrier Scoot, andmerged part of SilkAir’s finance team with its parent and offered unpaid leaveto cabin crew.” Through the mergers, SIA aims to “generate efficiencies andensure a consistent product at the full-service end of the market” so as to beable to compete with its international rivals rom the Chinese and the MiddleEast, as Singapore lacks the domestic flight markets to offset the competition.
The carrier has already merged budget arms Scoot and Tigerair Singapore andfolded its cargo arm back into Singapore Airlines. SIA has been in the past anable cost leader in the full-service airline business, a position that has”eroded” over the years. Analysis:Oligopoly:Oligopoly is the market structurethat is characterized by a small number of relatively large firms supplyingmost of the output in the market. An oligopoly is similar to that of amonopoly, except that rather than one firm, two or more firms dominate themarket. Horizontal Merger:When 2 or more firms legallycombine to form a larger firm; a firm combines with another firm that producesthe same product Price Leadership:An informal or tacit type ofcollusion with a price leader.
A price leader is a firm whose prices are followedby the rest of the industry. Applying Economics Concept ofOligopoly to the article: TheMarket Structure of the Airlines Industry: The market structure of theairline industry is an oligopoly. The market is dominated by a small number ofsellers, of which it can result in a collusion between the sellers to reducecompetition, and lead to higher prices for consumers. In an oligopoly marketstructure, the sellers are the price setters rather than the price takers,where they are able to maximise profits as a result. In Singapore, the airlineindustry comprises of a few merged airlines, such as how SIA has merged withScoot and Tigerair Singapore into SIA to maximise profits. With SIA as one ofthe few airline companies consumers can purchase their tickets from, consumershave to choice but to purchase from SIA.
The barriers to entry are high in thisoligopolistic market, where new companies can be pushed out of the market bystrategic actions from the bigger players in the market to discourage thesecompanies. There exists a few airline companies in Singapore whereby the actionof the price leader (SIA) can influence the actions of the other companies Withsellers merging under one firm, as in the case of SIA with Tigerair Singaporeand Scoot, this oligopoly have perfect knowledge of their own cost and demandfunctions, and access to advance technology for further improvements andadvancement to provide them that edge in this market. Alternatively, consumershave imperfect knowledge – to only price, cost and product. In this horizontal merger by theSIA, where SIA is the cost/price leader, the implication is that of when SIAraises its price above the current existing price, there is that risk whetherthe competitors will follow suit or not. In the event the other competitors donot follow, SIA would end up selling their plane tickets at a higher price,which would discourage consumers from buying from SIA – resulting in the SIAlosing their market share in the airlines industry.
Likewise, when SIA lowerstheir prices, their competitors would follow suit in order not to lose theirconsumers and in turn their market share so as to not lose profits entirely. Assuch, it is evident that the prices above the current existing price iselastic, while the prices below that existing point is inelastic. Conclusion:In conclusion, SIA is pushing theairline industry to be more oligopolistic in nature with SIA as the priceleader, to maximise profits in a more cost effective and efficient method.Consumers can expect further probable changes from SIA that lean towards a moreoligopolistic market in the future.