A market analyst at a coastal town records the demand and supply of ferry tickets during a music festival. Fig. 1 shows the curves before the festival begin...
Question 1 Report
A market analyst at a coastal town records the demand and supply of ferry tickets during a music festival. Fig. 1 shows the curves before the festival begins. The ferry firm has a fixed number of boats, so its short-run supply curve is shown as S. Visitors arrive from other parts of the country and are willing to pay more for travel to the island. The figure includes an equilibrium price, P1, and equilibrium quantity, Q1. The analyst is considering whether the firm should increase its ticket price.
(a) What is likely to happen to demand for ferry tickets when festival visitors arrive? [1]
(b) Identify the likely effect on the equilibrium price if supply remains unchanged. [1]
(c) Explain why the ferry firm may be unable to increase the quantity supplied immediately. [2]
Answer Details
(a) Demand for ferry tickets increases, so the demand curve shifts to the right. [1]
(b) With supply unchanged, the equilibrium price increases. [1]
(c) The number of boats or sailings is fixed in the short run. [2] Obtaining additional boats or recruiting trained labour takes time, so the firm cannot immediately increase capacity.
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