Airline Revenues: Supply and Demand (Context Rich Problem)

Oskar Harmon, University of Connecticut
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

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.

Learning Goals

By the end of this exercise, students should be able to:

  1. Understand how to represent a shift v a movement along the supply or demand curve.
  2. Analyze which curve is shifted by a change in underlying economic conditions.
  3. Calculate total revenue for a given market equilibrium.

Context for Use

This exercise is appropriate a principles of microeconomics class. It can be used in small class as a hands on exercise, or it can be used in any sized class as a homework assignment or an exam question. The exercise can be used in a computer lab setting, or in an online class as a homework assignment or an exam question. The activity takes about 20 minutes to complete. Students can work individually or in small groups. In a computer lab the student answers can be posted to a web page and the class can discuss and evaluate responses.

Description and Teaching Materials


AIRLINES INCREASE PRICES, AND REVENUES INCREASE
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

This exercise is appropriate after completing the chapter on supply and demand, and students have worked with diagrams in which both curves are shifted. If your students are new to context rich problems, you may need to help your students get comfortable with them. A helpful tip to students new to the topic of simultaneous shifts is the reminder that if the supply curve shifts back more than the demand curve, the equilibrium price increases, quantity decreases, and total revenue rises. Suggestions to students new to drawing economic diagrams can include: label the supply and demand curves (initial and final curves), label the initial and final equilibrium, use direction arrows for the shifts, identify rectangles for the revenue in each equilibrium, and labels for price quantity coordinates of the new equilibrium. The amount each curve shifts is determined by the assumption that the new equilibrium occurs at the price of $600 and 70,000.
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:

  1. identify factors that shift the supply curve;
  2. identify factors that shift the demand curve;
  3. how to calculate total revenue;

Assessment

The response is evaluated for whether the student has correctly identified the change in economic conditions as a shifter of the appropriate supply and demand, and whether the total revenue formula is correctly applied. The purpose of the assessment will determine whether or not you need a rubric.

References and Resources

  1. The Wall Street Journal article that is background for this exercise is: Airlines Weather Turmoil as Slump Cuts Demand (11/28/08)
  2. A quick start to using sumo paint is: http://www.youtube.com/watch?v=6GRHD8balAE
  3. An example of using this approach in Wikispaces: harmon.uconn.edu/Wikispaces.htm (link down)
  4. An example of a simple tool to create a grid for a graph: harmon.uconn.edu/GraphTool/index.html (link down)
  5. An easy to use online drawing tool: Google Draw: http://www.google.com/google-d-s/drawings/