Airline Revenues: Supply and Demand (Context Rich Problem)
Students are asked to write a one page report analyzing the effect of changes in underlying economic factors on airline revenues. The exercise is based on a current economic event. The student can be given a diagram representing the initial equilibrium. The completed diagram and explanation are presented in the one-page report.
By the end of this exercise, students should be able to:
- Understand how to represent a shift v a movement along the supply or demand curve.
- Analyze which curve is shifted by a change in underlying economic conditions.
- Calculate total revenue for a given market equilibrium.
Context for Use
Description and Teaching Materials
Your mother asked you about an article she just read that said airline revenues were rising despite the recession and rising fuel costs. She knows you are studying economics and asks you to explain how this happened. You sketch a diagram in which you assume that the initial average ticket price is $300 and the number of airline seats is 70,000. You recognize that the recession and rising fuel costs are supply/demand shifters and you sketch these in your diagram. You assume that new ticket price is $600 and the new number of seats is 40,000 and then you show your Mom how your diagram explains why airline revenues are increasing.
The text of the problem can be downloaded below.
Airlines Increase Prices and Revenues Rise (Microsoft Word 2007 (.docx) 188kB Mar26 12)
Teaching Notes and Tips
To draw a diagram, students can use a hand drawn diagram, or a digital diagram. For the latter, students draw a diagram in Google Draw, or drag the initial diagram to their desktop, and edit the diagram using Goggle Draw or Sumopaint.com/app (both free online image editors).
Students will need to have learned about the following topics before this activity is completed:
- identify factors that shift the supply curve;
- identify factors that shift the demand curve;
- how to calculate total revenue;
References and Resources
- The Wall Street Journal article that is background for this exercise is: Airlines Weather Turmoil as Slump Cuts Demand (11/28/08)
- A quick start to using sumo paint is: http://www.youtube.com/watch?v=6GRHD8balAE
- An example of using this approach in Wikispaces: harmon.uconn.edu/Wikispaces.htm (link down)
- An example of a simple tool to create a grid for a graph: harmon.uconn.edu/GraphTool/index.html (link down)
- An easy to use online drawing tool: Google Draw: http://www.google.com/google-d-s/drawings/