Sample Essay on ATE Chapter2&3

  1. ATE: Explain what is meant by “opportunity cost” and give an example in aviation? [5-points] An opportunity cost is the foregone value in choosing between mutually exclusive activities, events, or alternatives. A good example involves making a decision not to resume flights by an aviation company due to the decreased prices of air ticket due to competition. The cost undergone by the company by failing to make flights is known as the opportunity cost.


  1. ATE: What are some of the issues that complicate things when an industry such as aviation is regulated by the government? Discuss this from an economic regulation and not safety as outlined in the textbook. [5-points] In case government increases its taxes for an aviation firm, the cost of air tickets increases, hence lowering the quantity demanded by travelers. Customer will go for substitute goods that are cheaper in our case substitute good may refer to road transport or railway transport. This leads to lower profits for the company hence forcing the business to close.


  1. ATE: What is the difference between “microeconomics” and “macroeconomics”? [10-points] Microeconomics deals with economic decisions made by individual firms in regards to limited resource. An aviation company behavior towards resources allocation is covered under microeconomic. A good example is on the purchase of aviation fuel by an airline company. Macroeconomic on the other hand is involved in the study of structure, performance, decision making and behavior of the whole economy. An example would involve the effect of fuel price changes on the aviation industry.


  1. ATE: Explain what is meant by the “price elasticity of demand.” Give an aviation example of a product with “inelastic” and “elastic” demands.  [10-points] Price elasticity of demand is a measure used to determine change in quantity demanded in the market for an item and its price changes. Fuel is one of the aviation products that are price elastic. A small change in the quantity demanded lead to increased prices. labor is inelastic in the sense that the level of labor does not affects the prices of products in a great way.


  1. ATE: Very briefly define the law of supply and demand. [10-points] The law of demand and supply states that the lower the supply the higher the demand and the higher the price and vice versa. This means that shortages in quantity supplied for goods such as jet fuel will raise the quantity demanded hence making the prices to go up. Inversely, surplus in the input resources will lead to reduction in the quantity demanded hence lowering the prices.


  1. ATE: What factors influence the elasticity of demand for pilots. [5-points] Demand for pilots is affected by increased labor, hour of work and term of service. If the labor for pilots is at the higher range, companies have an easy time employing pilots. The number of hours that pilots work attracts them or discourages them from searching for work. Lastly, we have the working condition for employees. Good working conditions attract labor while bad conditions drive away potential labor.


  1. ATE: What are some of the factors that affect the demand for short-haul and long-haul aircraft? Is there a difference in the factors that affect their demand?Please explain.  [5-points] Short haul freights are affected by factors such as changes in incomes and customer taste and preferences. For long haul transport demand is affected by the number of customers, oil prices and government influence on business. The difference between the factors is that short haul factors affects microeconomic environment while the latter factors are attributed to the macroeconomic environment. The two environments are different in the way they operate.


  1. ATE: Explain derived demand and direct demand. Which of these two is the airline industry most characterized by?  Please explain your answer. [5-points] Derived demand comes into play due to the changes in demand of final goods. It therefore affects the demand of an intermediate good. Direct demand is realized through direct changes in the supply and demand of goods and services. Airline industry is characterized by derived demand because of the fact that airline business is affected by changes in other sections of the economy. Changes in the economy such as improved economic development leads to increased demand for air tickets.


  1. ATE: With the recent decreases in Oil prices, what effects would this have on the aviation and air transportation industry?  [5-points] Decrease in oil prices reduces the quantity supplied by the producers because the business is unattractive to investors. Quantity demand increases by a great deal due to the reduction in the prices of oil. Aviation companies will reduce the prices of air ticket instigating customer demand. Therefore, they will make a lot from the increases in air travel experience in the entire industry.