Inquiry case example - Airlines capturing consumer surplus

The market equilibrium price for an airline flight from New York to
Abu Dhabi is around $700. If you do a Google search you will find
carriers such as Virgin, British Airways and Etihad all charge around
this price for an economy ticket for this 13-hour return trip. The
airlines, however, know some consumers are willing to pay a much
higher price than $700.

Business travellers, for example, who need to travel for work and whose business is paying are
probably willing to pay much more than $700. The business traveller paying $700 for a ticket may
well be willing to pay $1500 and therefore have a consumer surplus of $800 ($1500 - $700). The
airlines understand this and have developed ways of capturing this surplus. If you make the airline
seat bigger, offer high-quality onboard food and drink throughout the trip and give the passenger a
luxury lounge to relax in before their flight you can charge a much higher price and capture some
consumer surplus. The Etihad business class ticket New York to Abu Dhabi is $2900.

Questions
a. Explain the difference between the consumer and producer surplus. [4]
Consumer surplus is the difference between what a consumer is willing to pay us what they actually paid .

Producer surplus is between the Market price and minimum producer is willing to accept in order to produce the product -

the difference ,
the
price a

b. Explain how airlines charging different prices for different tickets allows them to capture
willing if a consumer is to $200 for a ticket, but the ticket is $150 dollars , the
example Airlines tend always have "a better option" For , pay
consumer surplus. [4]
to .

for some benefits luggage extra leg space, and so on This allows the airlins
extra such as extra
upgrade their class , or pay
.

would suggest the consumer to

airline

to take out maximum from what a consumer is willing to pay ,

Investigation
Research into the airline industry to see how important different classes of travel are for airline
businesses trying to gain consumer surplus and earn higher profits.

airlines to capture consumer surplus

for
.

of travel important
Different classes
are
such things
but charge extra for
is doo keep the ticket prices low ,

For example Ryanair's strategy

,
does not make a large profit per
boarding , extra leg space , and ex traluggage Ryanair
priority
.

like
compensated by quick turn-around time of the flights .

but it is being
passenger ,

© Alex Smith
InThinking www.thinkib.net/Economics 1