Supply and demand is an economic model of price determination in a market.

It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers at current price will equal the quantity supplied by producers at current price, resulting in an economic equilibrium of price and quantity. The four basic laws of supply and demand are 1. If demand increases and supply remains unchanged then higher equilibrium price and quantity. 2. If demand decreases and supply remains the same then lower equilibrium price and quantity. 3. If supply increases and demand remains unchanged then lower equilibrium price and higher quantity. 4. If supply decreases and demand remains the same then higher price and lower quantity. Demand schedule The demand schedule, depicted graphically as the demand curve, represents the amount of some good that buyers are willing and able to purchase at various prices, assuming all determinants of demand other than the price of the good in question, such as income, tastes and preferences, the price of substitute goods, and the price of complementary goods, remain the same. Following the law of demand, the demand curve is almost always represented as downward-sloping, meaning that as price decreases, consumers will buy more of the good. Consumers will be willing to buy a given quantity of a good, at a given price, if the marginal utility of additional consumption is equal to the opportunity cost determined by the price, that is, the marginal utility of alternative consumption choices. The demand schedule is defined as the willingness and ability of a consumer to purchase a given product in a given frame of time.

On a unit demand curve, every change in price causes a constant change in quantity. For example, when price decreases by 2 from 10 to 8, the quantity increases from 1 to 2. When price decreases again by 2 to 6, the quantity will again change by 1. As described above, the demand curve is generally downward-sloping. There may be rare examples of goods that have upward-sloping demand curves. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods made more fashionable by a higher price). As with supply curves, economists distinguish between the demand curve of an individual and the market demand curve. The market demand curve is obtained by summing the quantities demanded by all consumers at each potential price. Thus in the graph of the demand curve, individuals' demand curves are added horizontally to obtain the market demand curve. Demand curve shifts

When consumers increase the quantity demanded at a given price, it is referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted to the right. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2. In the diagram, this raises the equilibrium price from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higher Q2. A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve. In the example above, there has been an increase in demand which has caused an increase in (equilibrium) quantity. The increase in demand could also come from changing tastes and fashions, incomes, price changes in complementary and substitute goods, market expectations, and number of buyers. This would cause the entire demand curve to shift changing the equilibrium price and quantity. Note in the diagram that the shift of the demand curve, by causing a new equilibrium price to emerge, resulted in movement along the supply curve from the point (Q1, P1) to the point Q2, P2). If the demand decreases, then the opposite happens: a shift of the curve to the left. If the demand starts at D2, and decreases to D1, the equilibrium price will decrease, and

the equilibrium quantity will also decrease. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has not shifted; but the equilibrium quantity and price are different as a result of the change (shift) in demand. The movement of the demand curve in response to a change in a non-price determinant of demand is caused by a change in the x-intercept, the constant term of the demand equation.

The determinants of demand follow: 1. Income An increase in income causes an increase in demand because the consumers' purchasing power increases Superior/ normal goods: Products whose demand increases as income increases (direct relationship) a. ex: after receiving a salary raise, a woman might buy a new outfit to award herself An exception is inferior goods, products whose demand decreases as income increases b. ex: as consumers get wealthier, they no longer buy used books because they can afford new ones 2. Tastes and preferences The tests and preference of consumer and seasonal changes also affect the demand. 3. Prices of related goods and services

Substitutes: The increase in the price of one good, will increase the demand for the other o ex: when iPod is more expensive than Zen, the demand for Zen increases; when iPod is cheaper than the Zen, the demand for the iPod increases. (There is a direct relationship between substitute goods) Complementary: When the increase in the price of one will decrease the demand for the other. These are jointly demanded goods o ex: when the price of contact cleansing solution decreases, the demand for both the solution and contacts would increase. (There is an inverse relationship between complementary goods)

4. Expectations

An expectation of higher future prices may cause customers to buy now

An expectation of higher sell prices later prompt speculators to buy property

o

ex:in a stock market, speculators invest in companies that they believe will be the most profitable expectation of higher prices in the future will cause increase current demand of a product/service/resource b/c consumers want to beat the projected rise

5. Number of Buyers Supply schedule The supply schedule, depicted graphically as the supply curve, represents the amount of some good that producers are willing and able to sell at various prices, assuming ceteris paribus, that is, assuming all determinants of supply other than the price of the good in question, such as technology and the prices of factors of production, remain the same. Under the assumption of perfect competition, supply is determined by marginal cost. Firms will produce additional output as long as the cost of producing an extra unit of output is less than the price they will receive. By its very nature, conceptualizing a supply curve requires that the firm be a perfect competitorthat is, that the firm has no influence over the market price. This is because each point on the supply curve is the answer to the question "If this firm is faced with this potential price, how much output will it be able to sell?" If a firm has market power, so its decision of how much output to provide to the market influences the market price, then the firm is not "faced with" any price, and the question is meaningless. Economists distinguish between the supply curve of an individual firm and the market supply curve. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. Thus in the graph of the supply curve, individual firms' supply curves are added horizontally to obtain the market supply curve. Economists also distinguish the short-run market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the short run: o the availability of one or more fixed inputs (typically physical capital), and o the number of firms in the industry. In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are flatter than their short-run counterparts.

Supply curve shifts

When the suppliers' unit input costs change, or when technological progress occurs, the supply curve shifts. For example, assume that someone invents a better way of growing wheat so that the cost of growing a given quantity of wheat decreases. Otherwise stated, producers will be willing to supply more wheat at every price and this shifts the supply curve S1 outward, to S2an increase in supply. This increase in supply causes the equilibrium price to decrease from P1 to P2. The equilibrium quantity increases from Q1 to Q2 as consumers move along the demand curve to the new lower price. As a result of a supply curve shift, the price and the quantity move in opposite directions. If the quantity supplied decreases, the opposite happens. If the supply curve starts at S2, and shifts leftward to S1, the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded. The quantity demanded at each price is the same as before the supply shift, reflecting the fact that the demand curve has not shifted. But due to the change (shift) in supply, the equilibrium quantity and price have changed. The movement of the supply curve in response to a change in a non-price determinant of supply is caused by a change in the y-intercept, the constant term of the supply equation. The supply curve shifts up and down the y axis as non-price determinants of demand change. The determinants of supply follow: 1. Production costs When the resource prices increase, production costs will also increase, therefore the supply will be reduced. In contrast, if the resource price decreases, supply will increase because production costs will decrease. For example: there is an increase of supply in a market when the resource price (labor) decreases because the wages for the workers also decrease. However, supply will decrease when there is an increase in wages for the workers. 2. The technology of production Technological improvements lowers production costs and increase supply, which enables firms to produce units of output with fewer resources.

Seldom are there negative changes in technology. For example: The use of robots in factories costs less than the use of factory workers (wages are too high). The robots are faster and more "accurate" than workers.

3. The price of related goods If a substitute product's price is higher, the manufacturer will chose to produce it.
o

For example: the manufacturer can chose to produce more expensive soccer balls and cheaper basketballs to derive greater profit.

4. Firm's expectations about future prices This is slightly ambiguous because even if the prices are expected to be higher in the future, the manufacturer might chose to manufacture less now and wait, or manufacture more now and sell them later. For example: If producers expect quantity demanded to increase in the future, then they would sell few currently at low prices, and sell many more in high prices in the future (since Qd will be high).
o

5. Number of suppliers

The larger the number of suppliers means greater market supply. The smaller the number of sellers means the market supply will be less.

For example: When the population of a nation increases, more firms and producers (suppliers) make a product, such as an iPod. Likewise, when the population of a nation is smaller, less firms make less of the iPod; direct variation. EQUILIBRIUM

In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the equilibrium values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal. Market equilibrium, for example, refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the equilibrium price or market clearing price and will tend not to change unless demand or supply change.

Equilibrium Price and Quantity: o equilibrium price : the price where the intentions of buyers and sellers are balanced Quantity Demanded (Qd) = Quantity Supplied (Qs). This is the most efficient allocation of resources.

It is the intersection of the supply and demand curves changes as a result of a shift in the supply or demand curve competition among buyers and sellers drive prices to the equilibrium price there is a surplus of products when the quantity supplied exceeds the quantity demanded

occurs when producing above the equilibrium point Often occurs as a result of a price floor, as long as the price floor is set above equilibrium price. there is a shortage of products when the quantity supplied is less than the quantity demanded Producing below the equilibrium point Often occurs as a result of a price ceiling, as long as the price ceiling is set below equilibrium price.

equilibrium quantity- the quantity demanded/supplied at the equilibrium price and there is no shortage or surplus of a product

Changes in Supply, Demand, and Equilibrium

Changes in Demand o An increase demand raises equilibrium price equilibrium quantity. o A decrease demand reduces equilibrium price equilibrium quantity.

in both and in both and

Changes in Supply o An increase in supply reduces equilibrium price but increases equilibrium quantity, o A decrease in supply raises equilibrium price, but decreases equilibrium quantity.

Supply Increase, Demand Decrease o price drop is even greater than if there was only one change o increase in supply > decrease in demand results in equilibrium quantity increase o increase in supply < decrease in demand results in equilibrium quantity decrease Supply Decrease, Demand Increase o price rise is even greater than if there was only one change o decrease in supply > increase in demand results in equilibrium quantity decrease o decrease in supply < increase in demand results in equilibrium quantity increase Both Supply and Demand Increase o increase in supply > increase in demand results in equilibrium price decrease o increase in supply < increase in demand results in equilibrium price increase o rise in equilibrium quantity is greater than caused by either change alone Both Supply and Demand Decrease o decrease in supply > decrease in demand results in rise of equilibrium price o decrease in supply < decrease in demand results in fall of equilibrium price o fall in equilibrium quantity is greater than caused by either change alone

About News papers of surat city. Gujarat Samachar

Gujarat Samachar Type Daily newspaper Format Broadsheet Owner Lok Prakashan Ltd. Publisher Shreyansh Shantilal Shah Founded 70 years ago Language Gujarati Headquarters Ahmedabad, India Circulation 9.59 lakh Daily. Gujarat Samachar, the No. 1 Gujarati daily in the state with a total readership of 73.6 lakh readers. Gujarat Samachar is a 24 page paper in the broadsheet format Reader Profile In Surat 67% circulation in urban area and 33% in rural area. There are following class of people read this news paper are below: Local Business men

Strong Religious beliefs

Years
7 2007 . 9 8 2008 . 7 9

No. of demanded lakhs)

copies No. of copies (In supplied/distributed (In lakhs)

7 . 8
N 2009 o . o f c o p i e s d e m a n d e d ( I n l a k h

s ) N o . o f c o p i e s s u p p l i e d ( I n l a k h s )

9 . 5 2 8 . 6 0

A b

o v e t a b l e s h o w s t h a t i n 2 0 0 7 t h e r e w a s a

d e m a n d o f n e w s p a p e r G u j a r a t S a m a c h a r 7 . 8

l a k h s p e r a n n u m a n d t h e y s u p p l i e d a r o u n d

7 . 9 l a k h s c o p i e s i n s u r a t c i t y . I n 2 0 0 8

t h e d e m a n d w a s i n c r e a s e f r o m 7 . 8 l a k h s t o

8 . 6 0 l a k h s a n d t h e y i n c r e a s e d s u p p l i e d f

r o m 7 . 9 l a k h s t o 8 . 7 9 l a k h s . A c c o r d i n g l y

i n 2 0 0 9 d e m a n d w a s r e a c h e d t o 9 . 4 0 l a k h s

a n d t h e y i n c r e a s e d s u p p l y u p t o 9 . 5 2 l a k h

s p e r a n n u m . H e n c e o v e r a l l i n c r e a s e i n d e m

a n d i s 1 . 6 l a k h s a n d s u p p l y i n c r e a s e b y 1

. 6 2 l a k h s p e r a n n u m .

D i v y a B h a s

k a r

D i v y a B h a s k a r i s a G u j a r a t i n e w s p a p e r i n

G u j a r a t , I n d i a , o w n e d b y D B C o r p L t d . . I t i

s t h e l a r g e s t c i r c u l a t e d G u j a r a t i d a i l y , w i t h

t h e m o s t n u m b e r o f e d i t i o n s i n G u j a r a t . C

D i

v y a B h a s k a r i s t h e l a r g e s t c i r c u l a t e d d a i l y o

f G u j a r a t a s p e r A B C ( A u d i t B u r e a u o f C i r c u l a

t i o n ) a n d h a s t h e m o s t e d i t i o n s b y a n y n e w s p a

p e r i n G u j a r a t . I t i s p u b l i s h e d f r o m A h m e d a b a

d , B a r o d a , S u r a t , R a j k o t , J a m n a g a r , M e h s a n a , B

h u j a n d B h a v n a g a r . T h e r e a r e 7 4 % o f u r b a n a r e

a c o v e r t h e s e c i r c u l a t i o n a n d 2 6 % o f r u r a l a r

e a . D i v y a B h a s k a r i s t h e o n l y o n e t o h a v e m a i

n t a i n e d a s t a t u s q u o w i t h a n e g l i g i b l e d e c l i n

e o f 1 0 , 0 0 0 r e a d e r s . I t s t o t a l r e a d e r s h i p a s p

e r Q 2 , 2 0 1 0 i s 5 4 . 8 4 l a k h .
Y e a r s 9.40

2007 2008 2009

4.81 5.25 8.40

4.9 5.6 8.68

Above table shows that in 2007 there was a demand of news paper Divya Bhaskar 4.81 lakhs per annum and they supplied around 4.9 lakhs copies in surat city. In 2008 the demand was increase from 4.81 lakhs to 5.25 lakhs and they increased supplied from 4.9 lakhs to 5.6 lakhs. Accordingly in 2009 demand was reached to 8.40 lakhs and they increased supply up to 8.68 lakhs per annum. Hence overall increase in demand is 3.59 lakhs and supply increase by 3.78 lakhs per annum.

Sandesh

Sandesh is a Leading daily newspaper in Gujarat. It is published in Gujarati. Sandesh started its journey in the world of Journalism in 1923. Since then, it has flourished into 5 editions and has played a critical and vital role in the upliftment and welfare of five crore Gujaratis. The Sandesh Limited is a listed and public limited company with Head Quarter at Ahmedabad. Till 1984, Sandesh was a single edition newspaper published from Ahmedabad. Then under expansion programme new editions were launched Baroda, Surat, Rajkot & Bhavnagar in 1985, 1989, 1990 and 1998 respectively. There are 61% of urban area cover these circulation and 39% of rural area. Sandesh, the No. 2 daily in the state with a total readership of 59.95 lakh, has also lost more than 2 lakh readers. Years 2007
5 2008 . 9 N 2009 o . o f c o p i

No. of copies No. of copies demanded (in supplied (In lakhs) lakhs) 5.73 6.1

e s d e m a n d e d (i n l a k h s ) N o . o f c o p i e s s u p p li e d (I n l a k h s )

5 . 7 5 . 6

A b o v e t a b l e s h o w s t h a t i n 2 0 0 7 t h e r e w a s a d e

m a n d o f n e w s p a p e r S a n d e s h 5 . 7 3 l a k h s p e r a n n u m

a n d t h e y s u p p li e d a r o u n d 6 . 1 l a k h s c o p i e s i n s u r a

t c it y . I n 2 0 0 8 t h e d e m a n d w a s d e c r e a s e fr o m 5 . 7 3 l

a k h s t o 5 . 6 l a k h s a n d t h e y d e c r e a s e d s u p p li e d fr o m

6 . 1 l a k h s t o 5 . 9 l a k h s . A c c o r d i n g l y i n 2 0 0 9 d e m

a n d w a s r e a c h e d t o 5 . 3 9 l a k h s a n d t h e y d e c r e a s e d

s u p p l y u p t o 5 . 7 l a k h s p e r a n n u m . H e n c e o v e r a ll d e

c r e a s e i n d e m a n d i s 0 . 3 4 l a k h s a n d s u p p l y d e c r e a

s e b y 0 . 4 0 l a k h s p e r a n n u m .

G u j a r a t m

it r a

E s t a b li s h e d i n 1 8 6 3 , t h e ' G u j a r a t m it r a i s

o n e o f t h e o l d e s t n e w s p a p e r s i n t h e c o u n tr y . I n it i

a ll y s t a rt e d a s a w e e k l y i n 1 9 3 6 t h e p a p e r w a s c o n v e

rt e d i n t o a d a il y . T h e s p ir it o f p a tr i o ti s m a n d m i s s i o

n a r y z e a l e s t a b li s h e d b y it s f o u n d e r S h ri D i n s h a w

A r d e s h ir T a l y a r k h a n w a s a t it s Z e n it h d u ri n g t h e fr e e

d o m s tr u g g l e a n d h a s b e e n m a i n t a i n e d e v e n t o d a y

. It s u r v e y e d 1 2 , 0 0 , 0 0 0 h o u s e h o l d s , w it h a t e a m

o f 1 0 5 0 s u r v e y o r s , 6 4 s u p e r v i s o r s , 1 6 z o n a l m a n

a g e r s a n d 4 d i v i s i o n a l m a n a g e r s . T h e s u r v e y o r s

w e r e g a t h e r e d l a r g e l y t h r o u g h p o s t e r s a t c o ll e g

e s a n d w o r d o fm o u t h p u b li c it y , i n s t e a d o f e x p e n s

i v e p ri n t a n d T V a d v e rt i s e m e n t s . A s p e r s u r v e y , D i v y

a B h a s k a r i s b e s t n e w s p a p e r t h a n t h e o t h e r c o m p e ti t o r b e

c a u s e 4 1 % r e s p o n d e n t s s a y t h a t " D i v y a B h a s k a r" i s a n e x c

e ll e n t n e w s p a p e r w h il e 1 7 % r e s p o n d e n t s s a y t h a t G u j a r

a t S a m a c h a r i s a n e x c e ll e n t n e w s p a p e r.
Y e a r s 1 2007 . 1

5 . 3 9

1 2008 .

4 7

0 . 8 5 20091.29

1.5

1.63

Above table shows that in 2007 there was a demand of news paper Gujarat Mitra 0.85 lakhs per annum and they supplied around 1.1 lakhs copies in surat city. In 2008 the demand was increase from 0.85 lakhs to 1.29 lakhs and they increased supplied from 1.1 lakhs to 1.47 lakhs. Accordingly in 2009 demand was reached to 1.5 lakhs and they increased supply up to 1.63 lakhs per annum. Hence overall increase in demand is 0.65 lakhs and supply increase by 0.53 lakhs per annum. Analysis of demand and supply of news papers. Price of each news paper.
Product G u j a r a t S a m a c h a r S a n d e s h G u j a

r a t M it r a

Rs. 2.5
Monday

Divya Bhasker Sunday

2 2 2

2 2
Thursday Friday

2 3

2 3

2 2

Tuesday2 Wednesday
2 2 2 3 3 2

Saturday

2 2 2

2
2

others
Year N o . o f c o p i e

s s u p p li e d (i n l a k h s )

0.35

0.32

0.43 2009

0.40

2007No. copies demanded lakhs) 2008

of (in
0 . 5 1

0.47

C ir c u l a ti o n o f N e w s P a p e

r s 2 SR 0 0 7 2 0 0 8 2 0 0 9 ( R s . I n l a k h s )

N e w s P a p e r 1 2
6.89 3 6.25 5.33 14 . 1 1 . 4 7 1

Divya Bhasker Gujarat Samachar

4.9 7.9

5.6 8.79

8.68 9.52

. 6 3

S a n d e s h 5Guj Others arat Mitr a

0.35

0.43

0.51

Analysis of over all circulation of news papers in surat for the years 2007, 2008, 2009

Case study Air India (D) (Tariffs) Air India, like the other members of the international air transport association (IATA), does not have full control over tariffs. Instead, the company and the Government of India have acceded to the decision of the traffic conferences of IATA in which the rule of unanimity applies. Never the less air India does have a policy and a point of view with regard to tariffs .the company favours lower fares and its representatives at the traffic conferences press for a fairly sharp reduction in tariffs as opposed to the gradual reduction in fares favoured by some other airlines and governments. Air Indias position was expressed in its 1962 -63 annual report as follows. Air Indias voice at Traffic Conferences, such as it is, has generally been in favour of lower fares with the object of achieving a mass market. Because of its lean and efficient operations resulting in almost the lower cost in the industry, air India well placed to observe the initial impact of lower fares and benefit from the resulting expectation of the market. IATA was formed in 1945 by the international air lines of countries in most part of the world, it was a legal existence by a special Act of the Canadian Parliament in 1945 it was associated closely with another organization, the International Civil Aviation organization (ICAO) which was established in 1945 as an agency for government which wished to Establish international standards for the regulation of the civil aviation.

Membership in IATA is opened to any airlines providing schedule air services licensed by a government eligible for membership in ICAO the international airlines are active members while the domestic airlines may join as associate members. The voting procedures of IATA are unusual when compared with those of others international organization each airline has a single vote regardless of its size. All decision must be unanimous. No decisions are effective without the approval of the interested governments, thus any single airline or any single government has the power to veto any decision. IATA is concerned with much more than traffic matters. It has committees dealing continuously with technical, medical, legal and financial issues. IATA through these committees promotes standards of safety, comfort and efficiency. Rules and procedures govern airlines in all parts of the world. An effort is made to simplify and standardize the documents which must flow from one airline to another. The association publishes manuals of revenue accounting practices which aim at the standardization of the reporting of costs, profits and losses. The IATA clearing house in London settles monthly accounts for interlines revenue transactions, making it possible for each airline to pay and collect debts in a single settlement. This case is concerned, however, with the rate making aspects of IATA which are perhaps the most complicated and controversial matters with which the organization must deal. THE IATA TRAFFIC CONFERENCES The steps in establishing tariffs on international routes are different from those of domestic routes. Before the tariffs are filed with the respective governments for approval, the airlines meet together to agree on a pattern of rates. These rates apply to all the carriers concerned. Unless all agree, no decision is binding. And the governments have the final say on whether the agreement after considerable give-andtake in the Traffic Conferences and for the governments to approve those agreement. Occasionally the conference a fail to reach an agreement or one or more government fail to sanction the agreement, but such failures of agreement are the exception rather than the rule. Furthermore, soon after a conference has failed to achieve an agreement, the airlines and government become quite uncomfortable with the possible anarchy in rates which might ensure: thus they soon reconvene to avoid this possibility. It is also the practice of each airline to refrain from vetoing an agreement affecting territories outside its main routes. The world is divided into three areas for the purposes of the Conference. Area No.1 covers the Americas. Area No.2 covers Europe, the Middle East and Africa and Area No.3 covers the rest of the world. Meetings deal separately with the relation between Area No.1 and Area No.2, Area No.2 and Area No.3 and Area No.3 and Area No.1. but the most important work takes place in the composite Conference covering the whole world, usually held every two years. Individual airlines make recommendation on traffic changes at these conferences. Traffic working groups and costs committees make careful studies of prospective traffic and costs of operation. The agreement

reached by past conferences consists of over 1000resolution covering rates between 60000 pairs of points in the world network. Among the criteria of rate-making considered by the Conferences are the following: a) b) c) d) e) f) Operating costs Traffic potential Local economics conditions Type of traffic to be moved Seasonal nature of the traffic Competition from non IATA carries such as the Steamship Companies.

CONFERENCE CRISES From time to time crises over specific issues require the adjournment and reconvenment of the Conference. In October 1959, for example the delegates failed to agree on fares and facilities in several parts of the world. Six months later the issue was resolved. As one commentator observed the agreement was accomplished by special excursion direction fares and group discount on those international routes where they were needed, by applied cabotage fares on certain others, and sealing of the repercussive effects on other routes by measures of no combinability and the like. Another crisis took place in 1960 and 1961 over cargo rates on the North Atlantic. It took three Conferences to settle this issue, but the fear of the consequences of a rate system brought about an agreement. THE 1962-63 CRISIS ON NORTH ATLANTIC FARES Although the North Atlantic run was relatively new among Air-India routes, the company took a great interest in the 1962-63 controversies over rates from New York to Europe. The crisis arose from the failure of one government to approve the agreements reached by the Traffic Conference of October 1962 at Chandler, Arizona on North Atlantic rates. Most of the 19 airlines involved on the trans-Atlantic run favoured a five per cent increases in the round trip rates in the form of a reduction in the terns-Atlantic return discount. The American and Canadian Airline did not oppose this rate increase. The crisis was brought to a head finally by the refusal of the United States Civil Aeronautics Board to accept the new rates. In fact the United States Civil Aeronautics Board threatened action against Pan American Airways and Trans World Airlines if they complied with the IATA recommendations. The American government was forced to back down when several European countries threatened not to permit American aircraft to land. Thus the new high rates went into effect in April 1963. In the period from April to October 1963 various proposals for reduced fares were published. Pan American Airways proposed a thrift-class fare on the North Atlantic which would be over 40 percent below the existing rates. BOAC pressed for a 25 percent reduction in first-class fares and excursion of existing execution rates.

One of the main factors contributing to the controversy over rates was the upsurge in capacity resulting from re-equipment with jet aircraft. The development of new national airlines added to the capacity. Some leaders in the industry argued that a restriction of capacity was essential to profitable operators. The shipping industry had been able to control capacity through a conference system; the same principle might be applied to the airlines. The IATA Traffic Conference which reconvened in Salzburg on October 22, 1963, was faced with the following specific proposals: Reduced the one-way first-class trans-Atlantic fare from $475 to $ 400; Reduced the one-way economy fare from $263 to $ 210 ; Introduced a around trip execution fare, valid for 21 days, at $ 300. Two of the smaller lines, Aer Lingus of Ireland and E1 A1 of Israel opposed these proposals, which included an abolition of group rates for members of clubs. AIR INDIAS POSITION ON PASSENGER FARES As has already been mention, Air India was a strong advocate of lower passenger fares. Company officials did not believe gradual decrease in fares will do much to stimulate traffic. They thought that the reduction must be substantial to be felt by the travelling public. One reason for Air Indias position was the large amount of excess capacity on the all of the airlines, including Air India. Exhibit 1 presents information on the capacity offered and the capacity utilized since Air India was established in 1953. In recent years the capacity had outrun the usage so that the load factor had fallen below 50%. It was hoped that lower fares would stimulate traffic and raise the load factor. One might ask while the company continued to increase capacity when the load factor was so low. One reason company officials gave was that Air India must increase its frequency of service if it was to win over customer. For example, they would like to build up a daily service across the Atlantic to New York so that potential customers would not have to worry about whether Air India was operating on a particular day. Extension of Bombay London service to New York which took place in May, 1969 could be justified on several grounds: it would feed traffic into the other company lines; it would help establish the Companys reception as an international carrier; and to some extent it would use planes which otherwise would be idle in London waiting for the turnaround. Company officials also believed that an airline which failed to expand its capacity might stagnate. In any case the company had added rapidly to its capacity, as Exhibit 1 so clearly demonstrates. Another related argument for lower rates was that added costs of filling up the aircraft would be negligible. Company officials believed that practically all of the costs were fixed. Exhibit 2 presents figures on the operating expenses in 1962 63.

On the revenue side, the companys position was that passenger traffic would respond very sharply to rate reductions. One company official expressed the view that the demand was highly elastic in all parts of the world if the rate reduction were large enough to be noticed. Perhaps Air India would benefit more than the average airline for several reasons: The Asia market provided a great pool of potential customers who could not afford the higher rates. The large number of Indians in such places as East Africa would like to visit their homeland and would like to save travel time if they could pay the air fares. Air India did not have to worry quite so much as some other lines such as KLM about the impact of lower fares on scheduled services on the traffic on charted services. Only one per cent of the companys revenues came from chartered services (see exhibit 3). At the same time, one company official noted a factor which was holding down the elasticity of demand for Air Indias passenger services. Under Indias exchange controls Indian citizens could not travel abroad without P Forms. The number of P Forms issued by the Indian Government was not influenced by whether fares were high or low. Approximately half of Air Indias traffic was by Indian Nationals. The arguments for higher fares emphasized the heavy capital outlay and rapid obsolescence involved in aircraft, the great economic and political uncertainties, the high cost of fuel, landing fees, taxes and other expenses. In the late 1950s and early 1960s the international air fares were inadequate to provide a profit for most airlines let alone to permit a profit which would compensate for the risk. Air India officials tended to prefer special discount to stimulate traffic, including seasonal discounts and discount for large groups. In the latter case it was necessary to provide special safeguards to assure that the group rates were used only by bona fide groups. In some cases, Air Indian sometimes charged less for segments of a particular route than would be consistent with the rate over the entire route. IATA permitted this practice when the competition from non IATA lines made it necessary. Air Indias position on cargo rates was not so strong, partly perhaps because only 15 per cent of its revenue came from that source. Air India favoured the practice of relating the cargo rates to the value of the cargo and of providing special rates to move cargo which otherwise would not move by air. Company official recognized that this last practice might lead to demands for rate reductions from other shippers. All in all, they seemed less convinced that cargo traffic would respond as much to rate reductions as passenger traffic would. THE ISSUE IN 1963 Air India had made a profit in 1961 62 and 1962 63 despite the reduction of its load factor to 45 per cent and despite the fact that most of the international airlines were unprofitable. The question was what was stand the company should take on the North

Atlantic fares, on fares in other part of the world, on proposals to restrict capacity, and on the IATA system in general.

Exhibit 1

Exhibit 2 AIR - INDIA Operating Expenses 1962 63 In Indian Rupees Particulars

1.A.

Flying operations:Pay, Allowances & Provident Fund Contributions Staff and other General Insurance Other staff Costs Fuel and Oil Aircraft Insurance Aircraft landing, Housing and Parking Fees Hire of Aircraft Other Operational Expenses Flying Training:Pay, Allowances & Provident Fund Contributions Fuel, Landing Fees, cost of Materials and Insurance Trading by Third Parties Flight Equipment Maintenance and Overhaul:Pay, Allowances & Provident Fund Contribution Staff Insurance Other Staff Costs Material Consumed Including outside Repairs and Services Charges for Technical Handing by other Operators Insurance of Equipment and Stores Other Engineering Expenses Traffic, sales and Publicity:Pay, Allowances and Provident Fund Contribution Staff and other General Insurance Other Staff Costs Booking Agency commission Publicity and Sales Promotion Charges for Traffic Handling by other Operators Other Traffic Expenses, including Rent, Rates, Printing and Stationary, Postage and Telegraphs, Telephones etc.

7,639,978 210,169 2,271,537 31,384,512 8,894,439 7,765,239 53,401 1,612,537 59,831,812 394,707 1,028,405 1,423,112

B.

2.

12,132,569 11,012 795,163 14,042,794 1,034,763 210,865 2,175,714 30,402,880

3.

14,734,370 59,839 2,832,873 16,603,058 13,798,220 5,363,622 11,381,106 64,773,088

4.

Passenger and Cargo Services:Pay, Allowances, & Provident Fund contribution 3,072,762 Staff and other General Insurance 55,657 Other Staff Cost 2,727,549 Food Service Including Hotel Accommodation and

Cabin Service Amenities Liability Insurance Other Expenses 5. Surface Transport:Pay, Allowances, & Provident Fund contribution Staff and other General Insurance Other Staff Cost Fuel and Oil Materials and Outside Repairs Hire of Transport Other Expenses General Administration:Pay, Allowances, & Provident Fund contribution (i) Finance and Accounts 3,828,824 (ii) Personnel and Security 653,947 (iii) Administrative and Planning 614,144 Staff and other General Insurance Other Staff Cost Board Members Fees and Expenses Auditors Fees and Expenses Legal Charges Other Expenses Staff Welfare:Pay, Allowances, & Provident Fund contribution Other Expenses (Net) Depreciation

7,345,344 1,021,309 585,733 14,808,454 1,029,115 134,672 47,572 438,898 357,030 749,649 253,396 3,010,332

6 .A.

5,096,915 45,631 353,364 8,880 46,235 144,888 1,552,815 7,248,728 369,128 102,695 233,320 621,015 182,119,421

B.

Exhibit 3 AIR INDIA How Every Rupee was earned

P e r c

e n t

P a r t i c u l a r s R s . i n l a k h s 6 5 . 1 W h a t t h e C o r p o r a t

i o n E a r n e d : 1 0 . 8 P a s s e n g e r s 1 , 5 9 5 . 7 4 1 4 . 9 M a i l s 2 6 4 . 5

2 1 . 2 F r e i g h t i n c l u d i n g e x c e s s B a g g a g e 3 6 6 . 8 1 1 . 7 C h a

r t e r s 3 0 . 9 7 6 . 3 C o n t r a c t S e r v i c e s 4 0 . 9 2 I n c i d e n t a l R e

v e n u e s 1 5 3 . 7 3

1 0 0 . 0

Total Operating Revenue2,455.65 How Every Rupee was spent 21.1 Wha t the Cor pora tion Spe nt 20.9 Emp loye es4 44.2 2 20.9 Traff ic and Pas sen ger Serv ice4 40.3 5

12.3 oper atio ns4 40.4 2 8.5 Dep reci atio n25 9.39 7.9E ngin eeri ng1 80.4 8 5.1B ooki ng Age ncy Co mmi ssio n16 6.03 2.4I nsur anc e 107. 18 0.9A dmi nistr atio n 50.7 2 Surf ace Tran spor t18.

46

100. 0

Tota l Ope ratin g Exp ens es2, 107. 25

Questions 1. should Air-India oppose or favour an open rate system? Should Air-India continue to support the IATA system? Answer : Air-india should in favour on an open rate system of IATA. Because its lean and efficient operations, resulting in almost yhe lowest cost in the industry. So Air-India is well placed in initial impact of lower fares and get benefit from resulting expansion of market. Here IATA is open for any airlines providing services licensed by a government eligible for members OF IATA. ICAO ( International Civil Aviation Organisation) which wish to establish international standard for regulation of civil aviation. IATA are unusual that each airlines has a single vote regardless of its size. And no decisions are effective without government approval. The objectives of both IATA traffic conference and Air-India is same. i.e. fairly sharply reduction in tariffs. 2.What stand should Air India Have Taken in October, 1963? Answer:

In the period from April to October 1963 various proposals for reduced fares were published. Pan American Airways proposed a thrift-class fare on the North Atlantic which would be over 40 percent below the existing rates. BOAC pressed for a 25 percent reduction in first-class fares and excursion of existing execution rates. One of the main factors contributing to the controversy over rates was the upsurge in capacity resulting from re-equipment with jet aircraft. The development of new national airlines added to the capacity. Some leaders in the industry argued that a restriction of capacity was essential to profitable operators. The shipping industry had been able to control capacity through a conference system; the same principle might be applied to the airlines. The IATA Traffic Conference which reconvened in Salzburg on October 22, 1963, was faced with the following specific proposals: Reduced the one-way first-class trans-Atlantic fare from $475 to $ 400; Reduced the one-way economy fare from $263 to $ 210 ; Introduced a around trip execution fare, valid for 21 days, at $ 300. Two of the smaller lines, Aer Ling us of Ireland and E1 A1 of Israel opposed these proposals, which included an abolition of group rates for members of clubs.

3.Should Air India co operate in plans for restricting capacity on international airlines? Answer : Air-India should not co-operate in plans for restricting capacity on international airlines because for sharply reduction in fare there must be increase the capacity of air lines so that the fare will reduce and airlines can also increase its profit. And Air-India thought that the reduction must be substation to be fell by the travelling public. Other reasons for non cooperation is what is that higher fares emphasized the capacity outlay and rapid obsolescence involved in air-craft , the great economic and political uncertainty ,the high cost of fuel , landing fees , taxes and other expenses. Air India is in favors because one of the factor is continuous increase the capacity which reduce the load factor. The company favored the practices of relating cargo rates to the value of the cargo and of providing special rates to move cargo which other otherwise would not move by air. Company official recognized that this last practice might lead to demands for rate reductions from other shippers. All in all, they seemed less convinced that cargo traffic

would respond as much to rate reductions as passenger traffic would. BIBLIOGRAPHY: http://welkerswikinomics.wetpaint.com/page/Market+Equilibrium http://welkerswikinomics.wetpaint.com/page/Demand http://welkerswikinomics.wetpaint.com/page/Supply http://en.wikipedia.org/wiki/Surat http://en.wikipedia.org/wiki/Supply_and_demand