1a) The impact of the terrorist attack on the airline travel market in the USA
After the terrorists attack the USA on 11 Sept, we will see the demand for the airline travel market drop. The uncertainty about the airline security affects the demand for travel into USA.
Demand is refer to the amount of goods that buyers are willing and able to purchase (Gan, King and Mankiw, 2002, p.63). The worry about another hijack corrodes the confidence level of potential tourists resulting in the demand curve to shift left from D0 to D1 as shown in fig.1. The demand curve shifts to the left rather than a movement to the left because consumers’ confidence is not found as a variable on the axis. This shift indicates that the quantity of Airline travel demanded is lower at every price. There is no shift in the supply curve as the Airline travel industry is still having the same amount of capacity, i.e., the same amount of seats.
The decreases in demand for Airline services reduce the equilibrium price from P0 to P1 and the equilibrium quantity from Q0 to Q1. At a price of P0, the quantity demanded by the market decrease to Qd, with quantity supplied at Q0. The difference between Qd and Q0 is the excess supply in the market. When there is excess supply in the market, the Airline suppliers’ desire to eliminate the surplus creates downward pressure on the price as indicate by the arrow pointing downward in fig.1. (McEachern, 1991, p.62) As price decreases, quantity demanded increase along D1 from P to E1, and the quantity supplied decrease along the supply curve from E0 to E1 where the market reaches equilibrium again....