Company out of class challenge: Which Markets should Southwest Airlines Enter A High elasticity of d

1
Company out of class challenge Which Markets
should Southwest Airlines Enter?A) High
elasticity of demand for airline travelB) Low
elasticity of demand for airline travelExplain
your answerTurn in at start of period next time

• Note that Southwest is a low cost carrier
• It needs full planes and high volume to make
  profits

2
Market without Southwest Equilibrium price and
quantity are P0 and Q0
Price
Supply
P0
Demand
Q0
Airline Passengers
3
Market with Southwest Supply Shifts out,
equilibrium price falls and equilibrium quantity
rises
Price
Supply
Supply with Southwest
P0
P1
Demand
Q0
Q1
Airline Passengers
4
Price
Supply
Supply with Southwest
Southwest needs total revenue to rise in the
market, and so the price reduction caused by the
outward shift in supply must be smaller in
percentage terms than the increase in quantity
P0
P1
Demand
Q0
Q1
Airline Passengers
5
The price reduction from the increase in quantity
will be larger in the inelastic demand market
than in the elastic demand market. With elastic
demand, price reductions will increase
revenue With inelastic demand, price reductions
will reduce revenue
Price
P0
P1e
P1i
Elastic Demand
Inelastic Demand
Q0
Q1
Airline Passengers
6
Company out of class challenge Southwest
Airlines wants to enter markets with high
elasticity of demand for airline travel