In 2018 the price of oil fell to a 14-year low. For drivers, the cost of driving fell significantly as gasoline prices plunged.

For the airline industry, the cost of operation also fell significantly because jet fuel is a major expense.

a. Draw a supply and demand diagram that illustrates the effect of a fall in the price of jet fuel on the supply of air travel.

b. Draw a supply and demand diagram that illustrates the effect of a fall in the price of oil on the demand for air travel. (Hint: think about this in terms of the substitutes for air travel, like driving.)

c. Put the diagrams from parts a and b together. What happens to the equilibrium price and quantity of air travel?

Despite the fall in the cost of driving, many more Americans chose to fly to their destinations during 2018 as incomes rose and people splurged on vacations that had been postponed during the Great Recession.

d. Using your results from part c, modify your diagram to illustrate an outcome in which the equilibrium price of air travel rises as people take more vacations by air.

Work It Out