final efm z 03
TRANSCRIPT
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Supply and demand is an economic model ofprice determination in a market. Itconcludes that in a competitive market, the unit price for a particular good will vary untilit settles at a point where the quantity demanded by consumers at current price willequal the quantity supplied by producers at current price, resulting in an economicequilibrium of price and quantity.
The four basic laws of supply and demand are
1. If demand increases and supply remains unchanged then higher equilibriumprice and quantity.
2. If demand decreases and supply remains the same then lower equilibrium priceand quantity.
3. If supply increases and demand remains unchanged then lower equilibrium priceand higher quantity.
4. If supply decreases and demand remains the same then higher price and lowerquantity.
Demand schedule
The demand schedule, depicted graphically as the demand curve, represents theamount of some good that buyers are willing and able to purchase at various prices,assuming all determinants of demand other than the price of the good in question, suchas income, tastes and preferences, the price of substitute goods, and the price ofcomplementary goods, remain the same. Following the law of demand, the demandcurve is almost always represented as downward-sloping, meaning that as pricedecreases, consumers will buy more of the good.
Consumers will be willing to buy a given quantity of a good, at a given price, if themarginal utility of additional consumption is equal to the opportunity cost determined bythe price, that is, the marginal utility of alternative consumption choices. The demandschedule is defined as the willingness and abilityof a consumer to purchase a givenproduct in a given frame of time.
http://en.wikipedia.org/wiki/Economic_modelhttp://en.wikipedia.org/wiki/Pricehttp://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Perfect_competitionhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Demand_curvehttp://en.wikipedia.org/wiki/Substitute_goodhttp://en.wikipedia.org/wiki/Complementary_goodhttp://en.wikipedia.org/wiki/Law_of_demandhttp://en.wikipedia.org/wiki/Opportunity_costhttp://en.wikipedia.org/wiki/Pricehttp://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Perfect_competitionhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Demand_curvehttp://en.wikipedia.org/wiki/Substitute_goodhttp://en.wikipedia.org/wiki/Complementary_goodhttp://en.wikipedia.org/wiki/Law_of_demandhttp://en.wikipedia.org/wiki/Opportunity_costhttp://en.wikipedia.org/wiki/Economic_model -
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On a unit demand curve, every change in price causes a constant change in quantity.For example, when price decreases by 2 from 10 to 8, the quantity increases from 1 to2. When price decreases again by 2 to 6, the quantity will again change by 1.
As described above, the demand curve is generally downward-sloping. There may be
rare examples of goods that have upward-sloping demand curves. Two differenthypothetical types of goods with upward-sloping demand curves are Giffen goods (aninferior but staple good) and Veblen goods (goods made more fashionable by a higherprice).
As with supply curves, economists distinguish between the demand curve of anindividual and the market demand curve. The market demand curve is obtained bysumming the quantities demanded by all consumers at each potential price. Thus in thegraph of the demand curve, individuals' demand curves are added horizontally to obtainthe market demand curve.
Demand curve shifts
When consumers increase the quantity demanded at a given price, it is referred to asan increase in demand. Increased demand can be represented on the graph as thecurve being shifted to the right. At each price point, a greater quantity is demanded, asfrom the initial curve D1 to the new curve D2. In the diagram, this raises the equilibriumprice from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higherQ2. A movement along the curve is described as a "change in the quantitydemanded" to distinguish it from a "change in demand," that is, a shift of the curve. Inthe example above, there has been an increase in demand which has caused anincrease in (equilibrium) quantity. The increase in demand could also come fromchanging tastes and fashions, incomes, price changes in complementary and substitutegoods, market expectations, and number of buyers. This would cause the entiredemand curve to shift changing the equilibrium price and quantity. Note in the diagramthat the shift of the demand curve, by causing a new equilibrium price to emerge,resulted in movement alongthe supply curve from the point (Q1, P1) to the point Q2, P2).
If the demand decreases, then the opposite happens: a shift of the curve to the left. Ifthe demand starts at D2, and decreases to D1, the equilibrium price will decrease, and
http://en.wikipedia.org/wiki/Giffen_goodshttp://en.wikipedia.org/wiki/Staple_foodhttp://en.wikipedia.org/wiki/Veblen_goodshttp://en.wikipedia.org/wiki/File:Supply-demand-right-shift-demand.svghttp://en.wikipedia.org/wiki/Giffen_goodshttp://en.wikipedia.org/wiki/Staple_foodhttp://en.wikipedia.org/wiki/Veblen_goods -
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the equilibrium quantity will also decrease. The quantity supplied at each price is thesame as before the demand shift, reflecting the fact that the supply curve has notshifted; but the equilibrium quantity and price are different as a result of the change(shift) in demand.
The movement of the demand curve in response to a change in a non-price determinantof demand is caused by a change in the x-intercept, the constant term of the demandequation.
The determinants of demand follow:
1. IncomeAn increase in income causes an increase in demand because the consumers'purchasing power increases
Superior/ normal goods: Products whose demand increases as incomeincreases (direct relationship)a. ex: after receiving a salary raise, a woman might buy a new outfit to awardherselfAn exception is inferior goods, products whose demand decreases asincome increasesb. ex: as consumers get wealthier, they no longer buy used books becausethey can afford new ones
2. Tastes and preferences
The tests and preference of consumer and seasonal changes also affect the
demand.
3. Prices of related goods and services
Substitutes: The increase in the price of one good, will increase the demand forthe other
o ex: when iPod is more expensive than Zen, the demand for Zen increases;when iPod is cheaper than the Zen, the demand for the iPod increases.(There is a direct relationship between substitute goods)
Complementary: When the increase in the price of one will decrease the
demand for the other. These are jointly demanded goodso ex: when the price of contact cleansing solution decreases, the demand
for both the solution and contacts would increase. (There is an inverserelationship between complementary goods)
4. Expectations
An expectation of higher future prices may cause customers to buy now
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An expectation of higher sell prices later prompt speculators to buy property
o ex:in a stock market, speculators invest in companies that they believe willbe the most profitable expectation of higher prices in the future will causeincrease current demand of a product/service/resource b/c consumers
want to beat the projected rise
5. Number of Buyers
Supply schedule
The supply schedule, depicted graphically as the supply curve, represents the amountof some good that producers are willing and able to sell at various prices, assumingceteris paribus, that is, assuming all determinants of supply other than the price of thegood in question, such as technology and the prices of factors of production, remain thesame.
Under the assumption of perfect competition, supply is determined by marginal cost.Firms will produce additional output as long as the cost of producing an extra unit ofoutput is less than the price they will receive.
By its very nature, conceptualizing a supply curve requires that the firm be a perfectcompetitorthat is, that the firm has no influence over the market price. This is becauseeach point on the supply curve is the answer to the question "If this firm is faced withthis potential price, how much output will it be able to sell?" If a firm has market power,so its decision of how much output to provide to the market influences the market price,then the firm is not "faced with" any price, and the question is meaningless.
Economists distinguish between the supply curve of an individual firm and the marketsupply curve. The market supply curve is obtained by summing the quantities suppliedby all suppliers at each potential price. Thus in the graph of the supply curve, individualfirms' supply curves are added horizontally to obtain the market supply curve.
Economists also distinguish the short-run market supply curve from the long-run marketsupply curve. In this context, two things are assumed constant by definition of the shortrun:
o the availability of one or more fixed inputs (typically physical capital), and
o
the number of firms in the industry. In the long run, firms have a chance to adjusttheir holdings of physical capital, enabling them to better adjust their quantitysupplied at any given price.
Furthermore, in the long run potential competitors can enter or exit the industry inresponse to market conditions. For both of these reasons, long-run market supplycurves are flatter than their short-run counterparts.
http://en.wikipedia.org/wiki/Supply_curvehttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Marginal_costhttp://en.wikipedia.org/wiki/Physical_capitalhttp://en.wikipedia.org/wiki/Market_entry_strategyhttp://en.wikipedia.org/wiki/Supply_curvehttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Marginal_costhttp://en.wikipedia.org/wiki/Physical_capitalhttp://en.wikipedia.org/wiki/Market_entry_strategy -
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Supply curve shifts
When the suppliers' unit input costs change, or when technological progress occurs, thesupply curve shifts. For example, assume that someone invents a better way of growingwheat so that the cost of growing a given quantity of wheat decreases. Otherwisestated, producers will be willing to supply more wheat at every price and this shifts thesupply curve S1 outward, to S2an increase in supply. This increase in supply causesthe equilibrium price to decrease from P1 to P2. The equilibrium quantity increases fromQ1 to Q2 as consumers move along the demand curve to the new lower price. As aresult of a supply curve shift, the price and the quantity move in opposite directions.
If the quantity supplied decreases, the opposite happens. If the supply curve starts at
S2, and shifts leftward to S1, the equilibrium price will increase and the equilibriumquantity will decrease as consumers move along the demand curve to the new higherprice and associated lower quantity demanded. The quantity demanded at each price isthe same as before the supply shift, reflecting the fact that the demand curve has notshifted. But due to the change (shift) in supply, the equilibrium quantity and price havechanged.
The movement of the supply curve in response to a change in a non-price determinantof supply is caused by a change in the y-intercept, the constant term of the supplyequation. The supply curve shifts up and down the y axis as non-price determinants ofdemand change.
The determinants of supply follow:
1. Production costsWhen the resource prices increase, production costs will also increase, therefore
the supply will be reduced. In contrast, if the resource price decreases, supply willincrease because production costs will decrease.
For example: there is an increase of supply in a market when the resource price(labor) decreases because the wages for the workers also decrease. However,supply will decrease when there is an increase in wages for the workers.
2. The technology of productionTechnological improvements lowers production costs and increase supply, which
enables firms to produce units of output with fewer resources.
Seldom are there negative changes in technology. For example: The use of robots in factories costs less than the use of factory
workers (wages are too high). The robots are faster and more "accurate" thanworkers.
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3. The price of related goodsIf a substitute product's price is higher, the manufacturer will chose to produce it.
o For example: the manufacturer can chose to produce more expensivesoccer balls and cheaper basketballs to derive greater profit.
4. Firm's expectations about future pricesThis is slightly ambiguous because even if the prices are expected to be higher in the
future, the manufacturer might chose to manufacture less now and wait, or manufacturemore now and sell them later.
o For example: If producers expect quantity demanded to increase in thefuture, then they would sell few currently at low prices, and sell many more inhigh prices in the future (since Qd will be high).
5. Number of suppliers
The larger the number of suppliers means greater market supply. Thesmaller the number of sellers means the market supply will be less.
For example: When the population of a nation increases, more firms and producers(suppliers) make a product, such as an iPod. Likewise, when the population of anation is smaller, less firms make less of the iPod; direct variation.
EQUILIBRIUM
In economics, economic equilibrium is a state of the world where economic forces are
balanced and in the absence of external influences the equilibrium values of economic
variables will not change. It is the point at which quantity demanded and quantity
supplied are equal. Market equilibrium, for example, refers to a condition where a
market price is established through competition such that the amount of goods or
services sought by buyers is equal to the amount of goods or services produced by
sellers. This price is often called the equilibrium price or market clearing price and will
tend not to change unless demand or supply change.
Equilibrium Price and Quantity:o equilibrium price : the price where the intentions of buyers and sellers are
balanced Quantity Demanded (Qd) = Quantity Supplied (Qs). This is the most
efficient allocation of resources.
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It is the intersection of the supply and demand curves changes as a result of a shift in the supply or demand curve competition among buyers and sellers drive prices to the
equilibrium price there is a surplus of products when the quantity supplied exceeds
the quantity demanded
occurs when producing above the equilibrium point Often occurs as a result of a price floor, as long as the price
floor is set above equilibrium price.
there is a shortage of products when the quantity supplied isless than the quantity demanded
Producing below the equilibrium point Often occurs as a result of a price ceiling, as long as the
price ceiling is set below equilibrium price.
o equilibrium quantity- the quantity demanded/supplied at the equilibriumprice and there is no shortage or surplus of a product
Changes in Supply, Demand, andEquilibrium
Changes in Demando An increase indemand raises bothequilibrium price andequilibrium quantity.o A decrease in
demand reduces bothequilibrium price andequilibrium quantity.
Changes in Supplyo An increase in supply reduces equilibrium price but increases equilibriumquantity,o A decrease in supply raises equilibrium price, but decreases equilibriumquantity.
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Supply Increase, Demand Decreaseo price drop is even greater than if there was only one changeo increase in supply > decrease in demand results in equilibrium quantityincreaseo increase in supply < decrease in demand results in equilibrium quantity
decrease Supply Decrease, Demand Increase
o price rise is even greater than if there was only one changeo decrease in supply > increase in demand results in equilibrium quantitydecreaseo decrease in supply < increase in demand results in equilibrium quantityincrease
Both Supply and Demand Increaseo increase in supply > increase in demand results in equilibrium pricedecreaseo increase in supply < increase in demand results in equilibrium price
increaseo rise in equilibrium quantity is greater than caused by either change alone
Both Supply and Demand Decreaseo decrease in supply > decrease in demand results in rise of equilibrium priceo decrease in supply < decrease in demand results in fall of equilibrium priceo fall in equilibrium quantity is greater than caused by either change alone
About News papers of surat city.
Gujarat Samachar
Gujarat Samachar Type Daily newspaper Format Broadsheet Owner Lok Prakashan
Ltd. Publisher Shreyansh Shantilal Shah Founded 70 years ago Language Gujarati
Headquarters Ahmedabad, IndiaCirculation 9.59 lakh Daily.
Gujarat Samachar, the No. 1 Gujarati daily in the state with a total readership of 73.6
lakh readers.
Gujarat Samachar is a 24 page paper in the broadsheet format
Reader Profile
In Surat 67% circulation in urban area and 33% in rural area.
There are following class of people read this news paper are below:
Local
Business men
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Strong Religious beliefs
Years No. of copiesdemanded (Inlakhs)
No. of copiessupplied/distributed(In lakhs)
7.9
2007
8.79
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8
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No.ofcopiesdemanded(Inlakh
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Years9.40 2007 4.81 4.9
2008 5.25 5.6
2009 8.40 8.68
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Above table shows that in 2007 there was a demand of news paper Divya Bhaskar 4.81
lakhs per annum and they supplied around 4.9 lakhs copies in surat city. In 2008 the
demand was increase from 4.81 lakhs to 5.25 lakhs and they increased supplied from
4.9 lakhs to 5.6 lakhs. Accordingly in 2009 demand was reached to 8.40 lakhs and theyincreased supply up to 8.68 lakhs per annum. Hence overall increase in demand is 3.59
lakhs and supply increase by 3.78 lakhs per annum.
Sandesh
Sandesh is a Leading daily newspaper in Gujarat. It is published in Gujarati. Sandesh
started its journey in the world of Journalism in 1923. Since then, it has flourished into 5editions and has played a critical and vital role in the upliftment and welfare of five croreGujaratis.
The Sandesh Limited is a listed and public limited company with Head Quarter atAhmedabad. Till 1984, Sandesh was a single edition newspaper published fromAhmedabad. Then under expansion programme new editions were launched Baroda,Surat, Rajkot & Bhavnagar in 1985, 1989, 1990 and 1998 respectively.
There are 61% of urban area cover these circulation and 39% of rural area.
Sandesh, the No. 2 daily in the state with a total readership of 59.95 lakh, has also lostmore than 2 lakh readers.
Years No. of copiesdemanded (inlakhs)
No. of copiessupplied (In lakhs)
2007 5.73 6.1
5.9
2008
No.ofcopi
2009
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.1
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47
0.8520091.29 1.5 1.63
Above table shows that in 2007 there was a demand of news paper Gujarat Mitra 0.85
lakhs per annum and they supplied around 1.1 lakhs copies in surat city. In 2008 the
demand was increase from 0.85 lakhs to 1.29 lakhs and they increased supplied from
1.1 lakhs to 1.47 lakhs. Accordingly in 2009 demand was reached to 1.5 lakhs and they
increased supply up to 1.63 lakhs per annum. Hence overall increase in demand is 0.65
lakhs and supply increase by 0.53 lakhs per annum.
Analysis of demand and supply of news papers.
Price of each news paper.
GujaratSamacharSandeshGuja
Product
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ratMitr
aDivyaBhasker
Rs.
Sunday2332.5222
Monday
Tuesday22222
Wednesday233222
2
Thursday
332
2
Friday
222
2
Saturday
2
others
No
.ofcopie
Year
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ssuppli
ed(inlakhs)
2007No. of copiesdemanded (inlakhs)
0.320.35
20080.400.430.51
2009
0.47
CirculationofNewsPape
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rs2007
20082009
SR
(Rs.
Inlakhs)
New
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2 GujaratSamachar
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3
1.11.471
4
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.63
Sandesh5GujaratMitra
Others 0.35 0.43 0.51
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Analysis of over all circulation of news papers in surat for the years 2007, 2008, 2009
Case study
Air India (D) (Tariffs)
Air India, like the other members of the international air transport association (IATA),does not have full control over tariffs. Instead, the company and the Government ofIndia have acceded to the decision of the traffic conferences of IATA in which the rule of
unanimity applies. Never the less air India does have a policy and a point of view withregard to tariffs .the company favours lower fares and its representatives at the trafficconferences press for a fairly sharp reduction in tariffs as opposed to the gradualreduction in fares favoured by some other airlines and governments.
Air Indias position was expressed in its 1962 -63 annual report as follows.
Air Indias voice at Traffic Conferences, such as it is, has generally been infavour of lower fares with the object of achieving a mass market. Because of its leanand efficient operations resulting in almost the lower cost in the industry, air India wellplaced to observe the initial impact of lower fares and benefit from the resulting
expectation of the market.
IATA was formed in 1945 by the international air lines of countries in most part of theworld, it was a legal existence by a special Act of the Canadian Parliament in 1945 itwas associated closely with another organization, the International Civil Aviationorganization (ICAO) which was established in 1945 as an agency for government whichwished to Establish international standards for the regulation of the civil aviation.
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Membership in IATA is opened to any airlines providing schedule air serviceslicensed by a government eligible for membership in ICAO the international airlines areactive members while the domestic airlines may join as associate members.
The voting procedures of IATA are unusual when compared with those of others
international organization each airline has a single vote regardless of its size. Alldecision must be unanimous. No decisions are effective without the approval of theinterested governments, thus any single airline or any single government has the powerto veto any decision.
IATA is concerned with much more than traffic matters. It has committees dealingcontinuously with technical, medical, legal and financial issues. IATA through thesecommittees promotes standards of safety, comfort and efficiency. Rules and proceduresgovern airlines in all parts of the world. An effort is made to simplify and standardize thedocuments which must flow from one airline to another. The association publishesmanuals of revenue accounting practices which aim at the standardization of the
reporting of costs, profits and losses. The IATA clearing house in London settlesmonthly accounts for interlines revenue transactions, making it possible for each airlineto pay and collect debts in a single settlement. This case is concerned, however, withthe rate making aspects of IATA which are perhaps the most complicated andcontroversial matters with which the organization must deal.
THE IATA TRAFFIC CONFERENCES
The steps in establishing tariffs on international routes are different from those ofdomestic routes. Before the tariffs are filed with the respective governments forapproval, the airlines meet together to agree on a pattern of rates. These rates apply to
all the carriers concerned. Unless all agree, no decision is binding. And thegovernments have the final say on whether the agreement after considerable give-and-take in the Traffic Conferences and for the governments to approve those agreement.Occasionally the conference a fail to reach an agreement or one or more governmentfail to sanction the agreement, but such failures of agreement are the exception ratherthan the rule. Furthermore, soon after a conference has failed to achieve an agreement,the airlines and government become quite uncomfortable with the possible anarchy inrates which might ensure: thus they soon reconvene to avoid this possibility. It is alsothe practice of each airline to refrain from vetoing an agreement affecting territoriesoutside its main routes.
The world is divided into three areas for the purposes of the Conference. AreaNo.1 covers the Americas. Area No.2 covers Europe, the Middle East and Africa andArea No.3 covers the rest of the world. Meetings deal separately with the relationbetween Area No.1 and Area No.2, Area No.2 and Area No.3 and Area No.3 and AreaNo.1. but the most important work takes place in the composite Conference coveringthe whole world, usually held every two years. Individual airlines make recommendationon traffic changes at these conferences. Traffic working groups and costs committeesmake careful studies of prospective traffic and costs of operation. The agreement
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reached by past conferences consists of over 1000resolution covering rates between60000 pairs of points in the world network.
Among the criteria of rate-making considered by the Conferences are the following:
a) Operating costsb) Traffic potentialc) Local economics conditionsd) Type of traffic to be movede) Seasonal nature of the trafficf) Competition from non IATA carries such as the Steamship Companies.
CONFERENCE CRISES
From time to time crises over specific issues require the adjournment andreconvenment of the Conference. In October 1959, for example the delegates failed to
agree on fares and facilities in several parts of the world. Six months later the issue wasresolved. As one commentator observed the agreement was accomplished by specialexcursion direction fares and group discount on those international routes where theywere needed, by applied cabotage fares on certain others, and sealing of therepercussive effects on other routes by measures of no combinability and the like.
Another crisis took place in 1960 and 1961 over cargo rates on the NorthAtlantic. It took three Conferences to settle this issue, but the fear of the consequencesof a rate system brought about an agreement.
THE 1962-63 CRISIS ON NORTH ATLANTIC FARES
Although the North Atlantic run was relatively new among Air-India routes, thecompany took a great interest in the 1962-63 controversies over rates from New York toEurope. The crisis arose from the failure of one government to approve the agreementsreached by the Traffic Conference of October 1962 at Chandler, Arizona on NorthAtlantic rates. Most of the 19 airlines involved on the trans-Atlantic run favoured a fiveper cent increases in the round trip rates in the form of a reduction in the terns-Atlanticreturn discount. The American and Canadian Airline did not oppose this rate increase.The crisis was brought to a head finally by the refusal of the United States CivilAeronautics Board to accept the new rates. In fact the United States Civil AeronauticsBoard threatened action against Pan American Airways and Trans World Airlines if they
complied with the IATA recommendations. The American government was forced toback down when several European countries threatened not to permit American aircraftto land. Thus the new high rates went into effect in April 1963.
In the period from April to October 1963 various proposals for reduced fares werepublished. Pan American Airways proposed a thrift-class fare on the North Atlanticwhich would be over 40 percent below the existing rates. BOAC pressed for a 25percent reduction in first-class fares and excursion of existing execution rates.
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One of the main factors contributing to the controversy over rates was theupsurge in capacity resulting from re-equipment with jet aircraft. The development ofnew national airlines added to the capacity. Some leaders in the industry argued that arestriction of capacity was essential to profitable operators. The shipping industry hadbeen able to control capacity through a conference system; the same principle might be
applied to the airlines.
The IATA Traffic Conference which reconvened in Salzburg on October 22,1963, was faced with the following specific proposals:
Reduced the one-way first-class trans-Atlantic fare from $475 to $ 400;
Reduced the one-way economy fare from $263 to $ 210 ;
Introduced a around trip execution fare, valid for 21 days, at $ 300.
Two of the smaller lines, Aer Lingus of Ireland and E1 A1 of Israel opposed theseproposals, which included an abolition of group rates for members of clubs.
AIR INDIAS POSITION ON PASSENGER FARES
As has already been mention, Air India was a strong advocate of lower passengerfares. Company officials did not believe gradual decrease in fares will do much tostimulate traffic. They thought that the reduction must be substantial to be felt by thetravelling public.
One reason for Air Indias position was the large amount of excess capacity on the allof the airlines, including Air India. Exhibit 1 presents information on the capacityoffered and the capacity utilized since Air India was established in 1953. In recent
years the capacity had outrun the usage so that the load factor had fallen below 50%. Itwas hoped that lower fares would stimulate traffic and raise the load factor.
One might ask while the company continued to increase capacity when the loadfactor was so low. One reason company officials gave was that Air India mustincrease its frequency of service if it was to win over customer. For example, they wouldlike to build up a daily service across the Atlantic to New York so that potentialcustomers would not have to worry about whether Air India was operating on aparticular day. Extension of Bombay London service to New York which took place inMay, 1969 could be justified on several grounds: it would feed traffic into the othercompany lines; it would help establish the Companys reception as an international
carrier; and to some extent it would use planes which otherwise would be idle in Londonwaiting for the turnaround. Company officials also believed that an airline which failed toexpand its capacity might stagnate. In any case the company had added rapidly to itscapacity, as Exhibit 1 so clearly demonstrates.
Another related argument for lower rates was that added costs of filling up theaircraft would be negligible. Company officials believed that practically all of the costswere fixed. Exhibit 2 presents figures on the operating expenses in 1962 63.
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On the revenue side, the companys position was that passenger traffic wouldrespond very sharply to rate reductions. One company official expressed the view thatthe demand was highly elastic in all parts of the world if the rate reduction were largeenough to be noticed. Perhaps Air India would benefit more than the average airlinefor several reasons: The Asia market provided a great pool of potential customers who
could not afford the higher rates. The large number of Indians in such places as EastAfrica would like to visit their homeland and would like to save travel time if they couldpay the air fares.
Air India did not have to worry quite so much as some other lines such as KLMabout the impact of lower fares on scheduled services on the traffic on charted services.Only one per cent of the companys revenues came from chartered services (see exhibit3).
At the same time, one company official noted a factor which was holding downthe elasticity of demand for Air Indias passenger services. Under Indias exchange
controls Indian citizens could not travel abroad without P Forms. The number of P Forms issued by the Indian Government was not influenced by whether fares were highor low. Approximately half of Air Indias traffic was by Indian Nationals.
The arguments for higher fares emphasized the heavy capital outlay and rapidobsolescence involved in aircraft, the great economic and political uncertainties, thehigh cost of fuel, landing fees, taxes and other expenses. In the late 1950s and early1960s the international air fares were inadequate to provide a profit for most airlines let alone to permit a profit which would compensate for the risk.
Air India officials tended to prefer special discount to stimulate traffic, including
seasonal discounts and discount for large groups. In the latter case it was necessary toprovide special safeguards to assure that the group rates were used only by bona fidegroups. In some cases, Air Indian sometimes charged less for segments of aparticular route than would be consistent with the rate over the entire route. IATApermitted this practice when the competition from non IATA lines made it necessary.
Air Indias position on cargo rates was not so strong, partly perhaps becauseonly 15 per cent of its revenue came from that source. Air India favoured the practiceof relating the cargo rates to the value of the cargo and of providing special rates tomove cargo which otherwise would not move by air. Company official recognized thatthis last practice might lead to demands for rate reductions from other shippers. All inall, they seemed less convinced that cargo traffic would respond as much to ratereductions as passenger traffic would.
THE ISSUE IN 1963
Air India had made a profit in 1961 62 and 1962 63 despite the reduction of itsload factor to 45 per cent and despite the fact that most of the international airlines wereunprofitable. The question was what was stand the company should take on the North
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Atlantic fares, on fares in other part of the world, on proposals to restrict capacity, andon the IATA system in general.
Exhibit 1
Exhibit 2
AIR - INDIA
Operating Expenses
1962 63
In Indian Rupees
Particulars
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1.A. Flying operations:-Pay, Allowances & Provident Fund Contributions 7,639,978Staff and other General Insurance 210,169Other staff Costs 2,271,537
Fuel and Oil 31,384,512Aircraft Insurance 8,894,439Aircraft landing, Housing and Parking Fees 7,765,239Hire of Aircraft 53,401Other Operational Expenses 1,612,537
59,831,812B. Flying Training:-
Pay, Allowances & Provident Fund Contributions 394,707Fuel, Landing Fees, cost of Materials and Insurance 1,028,405Trading by Third Parties -
1,423,112
2. Flight Equipment Maintenance and Overhaul:-Pay, Allowances & Provident Fund Contribution 12,132,569Staff Insurance 11,012Other Staff Costs 795,163Material Consumed Including outside Repairs andServices 14,042,794Charges for Technical Handing by other Operators 1,034,763Insurance of Equipment and Stores 210,865Other Engineering Expenses 2,175,714
30,402,880
3. Traffic, sales and Publicity:-Pay, Allowances and Provident Fund Contribution 14,734,370Staff and other General Insurance 59,839Other Staff Costs 2,832,873Booking Agency commission 16,603,058Publicity and Sales Promotion 13,798,220Charges for Traffic Handling by other Operators 5,363,622Other Traffic Expenses, including Rent, Rates,Printing and Stationary, Postage and Telegraphs,
Telephones etc.
11,381,106
64,773,088
4. Passenger and Cargo Services:-Pay, Allowances, & Provident Fund contribution 3,072,762Staff and other General Insurance 55,657Other Staff Cost 2,727,549Food Service Including Hotel Accommodation and
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Cabin Service Amenities 7,345,344Liability Insurance 1,021,309Other Expenses 585,733
14,808,454
5. Surface Transport:-Pay, Allowances, & Provident Fund contribution 1,029,115Staff and other General Insurance 134,672Other Staff Cost 47,572Fuel and Oil 438,898Materials and Outside Repairs 357,030Hire of Transport 749,649Other Expenses 253,396
3,010,332
6 .A. General Administration:-
Pay, Allowances, & Provident Fund contribution(i) Finance and Accounts 3,828,824(ii) Personnel and Security 653,947(iii) Administrative and Planning 614,144 5,096,915Staff and other General Insurance 45,631Other Staff Cost 353,364Board Members Fees and Expenses 8,880Auditors Fees and Expenses 46,235Legal Charges 144,888Other Expenses 1,552,815
7,248,728B. Staff Welfare:-
Pay, Allowances, & Provident Fund contribution 369,128Other Expenses (Net) 102,695Depreciation 233,320
621,015182,119,421
Exhibit 3
AIR INDIA
How Every Rupee was earned
Perc
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ent
ParticularsRs.inlakhs
6
5.1Whatthe
Corporat
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ionE
arned:10.8Passengers1,595.7414.9Mails264.5
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21.2F
reightinclu
dingexcessBaggage366.
811.7Cha
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rters
30.976.3Con
tractServices40.92IncidentalRe
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venue
s153.73100.0
Total Operating Revenue2,455.65
How Every Rupee was spent
21.1What theCorporationSpent20.9Employees444.2220.9Traffic
andPassengerService440.35
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12.3operations440.4
28.5Depreciation259.397.9Engineering1
80.485.1BookingAgencyCommission166.032.4Insurance107.180.9Administration50.72SurfaceTransport18.
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46100.0
TotalOperatingExpenses2,107.25
Questions
1. should Air-India oppose or favour an open rate system? Should Air-India
continue to support the IATA system?
Answer :
Air-india should in favour on an open rate system of IATA. Because its lean and
efficient operations, resulting in almost yhe lowest cost in the industry. So Air-India is
well placed in initial impact of lower fares and get benefit from resulting expansion of
market.
Here IATA is open for any airlines providing services licensed by a government eligible
for members OF IATA. ICAO ( International Civil Aviation Organisation) which wish to
establish international standard for regulation of civil aviation. IATA are unusual that
each airlines has a single vote regardless of its size. And no decisions are effective
without government approval.
The objectives of both IATA traffic conference and Air-India is same. i.e. fairly sharply
reduction in tariffs.
2.What stand should Air India Have Taken in October, 1963?
Answer:
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In the period from April to October 1963 various proposals for reduced fares werepublished. Pan American Airways proposed a thrift-class fare on the North Atlanticwhich would be over 40 percent below the existing rates. BOAC pressed for a 25percent reduction in first-class fares and excursion of existing execution rates.
One of the main factors contributing to the controversy over rates was theupsurge in capacity resulting from re-equipment with jet aircraft. The development ofnew national airlines added to the capacity. Some leaders in the industry argued that arestriction of capacity was essential to profitable operators. The shipping industry hadbeen able to control capacity through a conference system; the same principle might beapplied to the airlines.
The IATA Traffic Conference which reconvened in Salzburg on October 22,1963, was faced with the following specific proposals:
Reduced the one-way first-class trans-Atlantic fare from $475 to $ 400;
Reduced the one-way economy fare from $263 to $ 210 ; Introduced a around trip execution fare, valid for 21 days, at $ 300.
Two of the smaller lines, Aer Ling us of Ireland and E1 A1 of Israel opposedthese proposals, which included an abolition of group rates for members ofclubs.
3.Should Air India co operate in plans for restricting capacity on internationalairlines?
Answer :
Air-India should not co-operate in plans for restricting capacity on international airlines
because for sharply reduction in fare there must be increase the capacity of air lines so
that the fare will reduce and airlines can also increase its profit. And Air-India thought
that the reduction must be substation to be fell by the travelling public. Other reasons
for non cooperation is what is that higher fares emphasized the capacity outlay and
rapid obsolescence involved in air-craft , the great economic and political uncertainty
,the high cost of fuel , landing fees , taxes and other expenses.
Air India is in favors because one of the factor is continuous increase the capacity
which reduce the load factor.
The company favored the practices of relating cargo rates to the value of the cargo and
of providing special rates to move cargo which other otherwise would not move by air.
Company official recognized that this last practice might lead to demands for rate
reductions from other shippers. All in all, they seemed less convinced that cargo traffic
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would respond as much to rate reductions as passenger traffic would.
BIBLIOGRAPHY:
http://welkerswikinomics.wetpaint.com/page/Market+Equilibrium
http://welkerswikinomics.wetpaint.com/page/Demand
http://welkerswikinomics.wetpaint.com/page/Supply
http://en.wikipedia.org/wiki/Surat
http://en.wikipedia.org/wiki/Supply_and_demand
http://welkerswikinomics.wetpaint.com/page/Market+Equilibriumhttp://welkerswikinomics.wetpaint.com/page/Demandhttp://welkerswikinomics.wetpaint.com/page/Supplyhttp://en.wikipedia.org/wiki/Surathttp://en.wikipedia.org/wiki/Supply_and_demandhttp://welkerswikinomics.wetpaint.com/page/Market+Equilibriumhttp://welkerswikinomics.wetpaint.com/page/Demandhttp://welkerswikinomics.wetpaint.com/page/Supplyhttp://en.wikipedia.org/wiki/Surathttp://en.wikipedia.org/wiki/Supply_and_demand