News headline:澳門飛東南亞 單程 200 元
Introduction
Air Asia(亞洲航空) is an airline company which provides flights to the
southeastern Asian countries and it usually provides cheap tickets. Air Asia carries out
tertiary production because it provides services to consumers. Since Air Asia is such a
large firm, it will practise division of labour and workers can specialize on a part of
the service. This can help to increase their labour productivity. Although the tickets
are cheap, the air tickets of Air Asia are still scarce goods because it can’t satisfy all
people’s wants. More tickets are preferred and there’s a production cost of providing
air flight services. The entrepreneur of Air Asia will manage the business and bear
business risk. Also to make the major decisions of production, just like the case of
expanding its flight services to Macao.
About the news
The entrepreneur had decided to provide cheap flight tickets from Macao to
southeastern Asian countries.

When the price of tickets is lower than the equilibrium(即使最貴也較正常機票
低二成), quantity supplied will be smaller than quantity demanded. There will
be excess demand.

P
S
Pe
excess demand
Ticket price
of Air Asia
D
Qe
Qs
< Qd
Tickets of Air Asia
Q

If the elasticity of demand to Air Asia’s tickets is elastic (inelastic), percentage
increase in quantity demanded is greater (smaller) than percentage decrease in
price. Gain is larger (smaller) than loss and the total revenue will increase
(decrease).
If the elasticity of demand to Air Asia’s tickets is unitarily elastic, percentage
change in quantity demanded will equal to percentage change in price. Gain is
equal to loss and the total revenue will remains unchanged.
Case of Elastic Demand
Case of Unitarily Demand
P
P
S1
S2
S1
LOSS
S2
LOSS
GAIN
0
GAIN
Q
0
Tickets of Air Asia
Q
Tickets of Air Asia
The demand to the Air Asia’s ticket tends to be more elastic. It is because air tickets are
not necessities and there are lots of other alternative airline companies provide air flights to
southeastern Asian countries.
*(assume that there is no excess demand)

Compare the tickets price of Air Asia and its substitutes (other companies). Take
a flight from Macao to Bangkok plus return (provided by Air Asia) and a flight
from Hong Kong to Bangkok plus return (provided by Cathay Pacific) as an
example,
The ticket price of the flight provided by Cathay Pacific
The ticket price of the flight provided by Air Asia
=$1850
$195x2(corr. to nearest integer)
=$1850 = 4.74
$390
1
= 5 (corr. to nearest integer)
1
Therefore, the relative price of ticket provided by Cathay Pacific is 5 tickets provided
by Air Asia. Since the relative price of tickets provided by other companies is so high,
the demand for their tickets will decrease. The equilibrium price and Quantity
transacted will both decrease.
S
P1
P2
D2
D1
Q2 Q1
Tickets of Cathay Pacific

Since the ticket price is so low, Air Asia will have to reduce the production
cost. Type of planes will be fixed and meal service will not be provided. There
will be no first-class seats or business seats.

In order to raise capital, the Air Asia will become listed in Kuala Lumpur(吉隆
坡) and the USA. The company will issue shares to the public. Air Asia will
become a public company.
Conclusion
Since there are so many companies providing cheap air flight services within
southeastern Asian countries, it illustrates that the competition inside the market is
very fierce. However in the long run, companies can’t rely on price-cutting to attract
consumers. They will need to provide better services or other promotional items, such
as air mileage to increase their competitiveness.