Section of the syllabus: Microeconomics Essay

The situation created by the poignant festival of Idul Fitri, builds a significant impact upon the market for airlines, in Medan, Indonesia. We are vividly able to delineate this in the misuse of the consumers’ excess demand, by the suppliers, i.e. the airlines. Thus reinforcing the need to apply price controls in order to keep the consumers interests into consideration also.

During non-holiday periods of the year, the market for airlines, would follow the Law of Demand1, ceteris paribus, if the price of a good or a service increases then the quantity demanded would decrease, since the number of substitutes is very high in this market, for example: Lion Air, Adam Air, Garuda Airlines and many more. Therefore if the price of air tickets increases of a particular airline, its demand will decrease as the consumers will divert to the substitutes. Furthermore this shows that the demand is fairly elastic, which means that if there is a small amount of increase in the price of the air tickets, the quantity demanded will decrease more than proportionately.

This is seen in the graph below, where price increases (b) from P1 to P2 and leads to a more than proportional (a) decrease in quantity demanded from Q1 TO Q2.

However, through the article we can discern that during this holiday period of Idul Fitri, the demand for this service is extremely high and has become relatively inelastic, “the higher fares were not discouraging people from flying.” Since, all the airlines had increased their prices, leaving the consumers with no other option.

Elasticity2 measures the responsiveness of the quantity demanded of a good or a service if there is variation in its price. Thus, in Medan, we can see that the Airline services are taking advantage of this inelastic situation of the demand to increase their own revenue. An inelastic situation would mean that even if there is an amount of increase in price it will lead to no change in the quantity demanded.

Moreover it can be said that, there is an excessive demand created due to the festival of Idul Fitri and “extended holidays” and due to this excessive demand for the service, and the constant supply for it (as there are no increase in the number of flights), it makes the situation advantageous for suppliers and they seem to be taking advantage of their consumers by increasing prices extravagantly. This is highlighted in the article when said, “Fares might increase up to 50%” and the “airlines were violating the regulation by offering their cheapest tickets at Rp.700, 000 per person.”

In addition to this, the airlines are a public transport service, so the consumer’s interest being kept into consideration is extremely important whether the airline is owned privately or by the government. Thus, in view of this case of extremely high ticket fares, another significant matter is thrown light upon: Price control3. In the article it is clearly stated that, “Government regulation required air fares for the Jakarta- Medan route to be kept within the range of Rp.581,000 to Rp.1,298,190.” Thus, the government should take some immediate action to apply maximum prices on the air- ticket fares.

Maximum price 4is a ceiling price applied on the prices of the goods and services, to form an upper limit. This price is always below the equilibrium point, and is a demarcation point after which the suppliers cannot increase their prices. In this case the maximum price is Rp.1,298,190 (P2), whereas presently the air tickets are being sold for a maximum of Rp.1, 4 million (P1) per person.

Therefore, through the application of the maximum prices, the consumer spending would decrease on air tickets which, earlier, seemed to be a waste since they can be sold for lower prices.

Another method that the government can utilize which is normally applied on monopolies but can fit perfectly in this case also, is to appoint a “Watchdog” with power to control the prices and profits of the companies.5 Through this method there would be a constant eye on the companies’ prices being decided with the interests of the consumers in mind.

Therefore, in my opinion, though this situation acts as a tool for the suppliers to increase their revenues, but ethically it doesn’t seem right for them to take advantage of the excessive demand in such a major way, thus in order to bring this matter under control , the government should take instantaneous action by applying the necessary price control measures.

1 Economics from a Global Perspective, Second Edition by Alan Glanville, Page number: 24

2 Glanville, Page number: 56

3 Glanville, Page number: 41

4 Glanville, Page No: 41- 42

5 Glanville, Page number: 162