Explain economic principles and their applications in the real world. Summarize the different types of market structures and the role of government in economics.
Introduction of Selected Industry
The industry which we have selected for this assignment or academic exercise is the Air Transportation Industry. Firms which operate in this industry provide transportation services to passengers and also, they provide cargo services to producers that operate in different industries. It is essential to acknowledge that the Air Transportation Industry is further divided into different subsectors, scheduled and non-scheduled transportation. Also, the Subsector of the industry that provides cargo services is affected by slightly different economic factors in comparison to the Subsector of an air-transportation industry that emphasizes only the transportation of passengers (airlines).
As per statistics, the Air Transportation Industry employs more than half a million people, who work at different tiers and sections of the industry. For instance, the Air Transportation Industry employs around 36, 940 aircraft mechanics and service technicians. The number of pilots, co-pilots, and flight engineers that work in this industry is 75, 120. The total number of Ticket Agents and Travels Clerks are 83, 320.
From the size of the workforce, of the selected industry, it is quite apparent that the Air Transportation Industry is a large industry, which strongly affects the economy of the United States. Though the size of the industry is large; there are only a handful of firms that operate in this industry (Bureau of Labor Statistics, 2018).
Structure and Characteristics of Market
Every market has characteristics, and these characteristics allow economists to define a market. For instance, when there is only a single seller and several buyers in a market, such a market is identified as Monopoly. To understand the structure of the industry, we will emphasize on 1) the number of firms that operate in that industry, 2) share of these firms in the selected industry, 3) barriers to entry, 4) substitutes and 5) shape of the demand curve for this industry.
It is true that the Transportation Industry employs more than half a million people; however, it is also a fact that only a handful of firms operate in this industry. When we emphasize the cargo Subsector of the industry, we learn that even fewer firms operate in the cargo sector of the Air-Transportation industry.
In the airline Subsector of Air Transportation Industry, four firms (Delta-American-United-Continental) have the market share of 60.1%, which suggests that this sub-sector of Air-transportation Industry is an oligopoly (The Travel Insider, 2010).
The barriers to entry are high, because of two reasons; large economies of scale and industry in the long run. The investment which is required to enter the industry and operate in the short run is immense. As a lot of time is required to hit the economies of scale or reach the lowest point of the average cost curve; therefore, many firms avoid investing in the industry, especially when few companies or firms have more than 60% market share.
The demand curve for the industry is quite steep in the short run. It is because customers have very options. Studies about demand curves assert that when there are not many substitutes in the market, the demand for that good is generally steep. The steep demand curve suggests that when the price increases, for a particular normal good or service, the demand decreases, but not proportionately; the decrease in quantity demanded is smaller than the increase in price. Generally, the destinations, which can be accessed only by air, have a steep demand curve. Destinations that can be reached by train or automobile have a flatter demand curve. It suggests that destinations and availability of substitutes strongly influence the shape of the demand curve.
Cargo flights have a very steep demand curve because very few firms exercise this option because of its cost. These firms prefer air-cargo because of exogenous reasons, rather than endogenous. For instance, when the schedule is tight, and it is imperative to deliver goods on time, firms opt for air-cargo.
Economics Principles at Play
The study of the Air – transportation industry reveals that several economic principles are at play in Air-Transportation Industry. For instance, because of the large economies of scale, very few firms are operating in this industry. The firms which have been operating for quite some time, have matured their systems and increased their market presence. Because of large economies of scale and extraordinarily large market-share of a few firms, barriers to entry are high (natural barriers to entry). It makes Air-transportation industry an oligopoly, where the top four firms influence both market and industry.
As there are not many substitutes, therefore, the demand curve is very steep, especially for those destinations which people prefer to reach by airplane. However, destinations that are not very far and can easily access by car or train, demand for air-tickets for such destinations is flat in comparison to the distant destinations.
Notable Trend
The air-transportation industry has become a global industry, and different companies around the world are competing to increase their market share (increase in the sale of air-tickets to international clients/customers). This competition has compelled companies to decrease their fares for international flights and improve the quality of services. As the competition in the international market grows, prices of international air flights will reduce, and the quality of services will improve. This development will increase consumer surplus and innovate air-transportation industry (Trejos, 2014).
Conclusion
In the end, it can be concluded that Air-transportation industry is a large industry, which is oligopoly is the United States, but monopolistically competitive industry globally. As the global industrial and market structure, of Air-transportation industry, is changing, so does the prices and quality of services. Currently, two strong developments are influencing the industry and market structure of the air-transportation industry; 1) increase in air travel and 2) increase in competition. These changes will have a positive impact on the selected industry.
References
Bureau of Labor Statistics. (2018, July 31). Industries at a Glance. Retrieved from https://www.bls.gov/iag/tgs/iag481.htm
The Travel Insider. (2010, December 1). Airline Competition 1980-2010 R.I.P. Retrieved from https://www.thetravelinsider.info/airlinemismanagement/airlineoligopoly.htm
Trejos, N. (2014, June 5). Report: Global airline industry to face more competition. Retrieved from https://www.usatoday.com/story/todayinthesky/2014/06/05/global-airline-industry-competition-low-cost-carrier-middle-east/10028127/
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