Question

Suppose that growth in online retailing has causes an increase in the demand for fast delivery of imported consumer goods to major urban centers and as a result, the demand for belly cargo space on passenger air flights from Asia to North America increases. Draw and explain an appropriate economic model or models that illustrate(s) the impact that increased cargo demand has on freight rates and passenger ticket prices.

Answer 1

The demand of cargo space is increasing due to increase in demand of fast delivery of consumer goods. Since the demand is increasing and the resources are limit i.e. space in this case.

Effect on passenger ticket:

The resources are limited. Therefore, the space has to be adjusted through passenger space. In order to manage demand and supply of passenger ticket. The prices of passenger flight would increase which lead to decrease in demand of passenger tickets.

prices of passenger ticket D1 D1 demand of passenger ticket.

Effect on freight rates:

If the flight company decide to not settle the prices of passenger ticket. It would increase the prices of freight so that the transportation of cargo through airways would be reduced.