STO.

NIÑO COLLEGE OF ORMOC

DOÑA FELIZA MEJIA VILLAGE, ORMOC CITY

BASIC MICROECONOMICS
BSBA - 2

CASE STUDY FOR FINAL EXAM AND OUTPUT

IN BASIC MICROECONOMICS

PRESENTED BY
CARLA JANE C. BAZARTE

PRESENTED TO
MARY CRIS MAÑAGO

JANUARY 23, 2024

 CASE STUDY 1
MAS to raise fares, fuel surcharge
Kuala Lumpur: Malaysia Airlines will raise fuel surcharge in the next few weeks on a route-by-
route basis due to skyrocketing fuel prices which means fares will be higher. Its managing
director Datuk Seri Idris Jala said: "Obviously, our fuel surcharge will remain competitive as we
would not want our planes to be empty by overpricing.
"We will monitor this closely on a route-by-route basis," he said in a statement issued after the
national carrrier's annual general meeting here today. He also said the national carrier will
continue adjusting its fares and fuel surcharge to recover some of the fuel costs and in line with
the practice of its competitors.
On fuel hedging, Idris said MAS hedged 43 percent of its 2008 fuel requirements in line with the
hedging policy of its competitors in the region. However, he said it was getting more expensive
to hedge in an environment where fuel prices escalate at an alarming rate. On another note,
Idris said MAS was reducing capacity during low seasons and reviewing its routes and flights
which are losing money.
"We are reducing about six percent of our capacity. We are cutting flight frequencies in order to
increase seat factor in line with the higher breakeven seat factor triggered by the record oil
price," he said.
A) State the law of demand.
The law of demand states that, ceteris paribus (all things being equal), the quantity
demanded of a good or service will decrease as its price increases. In other words, as the price
of a good or service increases, consumers are less willing and able to purchase it.
In the case of Malaysia Airlines raising fares and fuel surcharges, the law of demand
suggests that all else being equal, there will be a decrease in the quantity of air travel
demanded by consumers. As the fares and fuel surcharges increase, consumers may find the
cost of air travel to be less affordable or less attractive compared to other alternatives, such as
driving or taking a train. This may result in a decrease in demand for air travel and potentially
lead to empty planes if the prices are overpriced.
B) Based on the article above, why has MAS decided to increase the fares?
The decision to increase fares by MAS is mainly due to the skyrocketing fuel prices. The
airline has witnessed a significant increase in fuel costs, which has led to the need for a price
adjustment. As a result, MAS has decided to raise fares and fuel surcharges to cover the
increased fuel expenses. The managing director of MAS, Datuk Seri Idris Jala, emphasized the
importance of remaining competitive with the fuel surcharge and ensuring that the fares are
not overpriced to the extent that it would cause a decline in passenger numbers. MAS will
closely monitor the pricing on a route-by-route basis to strike a balance between cost recovery
and maintaining passenger demand. MAS has also taken steps to reduce capacity during low
seasons, review unprofitable routes, and adjust flight frequencies to optimize the seat factor
and offset the impact of high oil prices.
C) Sketch an appropriate diagram to show the above market situation.
PRICE

P1

P2

Q1 Q2 QUANTITY

D) What will happen to the demand for MAS seats if the AirAsia fare falls? Why?
If the AirAsia fare falls, the demand for MAS seats will likely decrease. This is because
AirAsia and MAS are direct competitors in the airline industry in Malaysia, and if AirAsia reduces
its fares, it becomes a more attractive option for cost-conscious travelers.
Lower fares offered by AirAsia would make it a more economical choice for customers,
leading to a potential shift in demand from MAS to AirAsia. This is especially true for customers
who are price-sensitive and willing to sacrifice some level of service or amenities for a cheaper
ticket. Additionally, the fuel surcharge increase implemented by MAS may make its fares less
competitive compared to AirAsia, further affecting demand. Hence, if AirAsia fares fall, MAS
may experience a decrease in demand for its seats.
E) Suppose price elasticity of demand for MAS seats is more than one.
This implies that if MAS were to raise fares due to the increase in fuel surcharge, the
demand for their seats would decrease significantly. As a result, they may risk having empty
planes if they overprice their fares. MAS's managing director, Datuk Seri Idris Jala, recognizes
this and mentions that the fuel surcharge will remain competitive to avoid such a situation. This
indicates that MAS is aware of the price sensitivity of their customers and is taking steps to
ensure that their fares are still attractive in the face of rising fuel costs.
I) Define price elasticity of demand.
Price elasticity of demand is a measure that shows how sensitive the demand for a
product is to changes in its price. It quantifies the percentage change in the quantity demanded
of a product resulting from a 1% change in its price. Price elasticity of demand is calculated as
the percentage change in the quantity demanded divided by the percentage change in price.
ii) Based on (e), sketch a diagram to show this price elasticity of demand.

Price of x Elastic demand

Supply

P1
Demand
P2

Quantity demand Q1 Q2
of x
 CASE STUDY 2
Import of buffalo meat necessary to meet local beef demand
JOHOR BARU: Malaysia has no choice but to import buffalo meat from India as local production of beef
is insufficient to meet domestic demand.
Veterinary Services Department director-general Datuk Dr Kamarudin Md Isa said the cost of beef would
go up if imports were to stop. "Consumers in Indonesia are paying about RM56 per kg for beef as the
country has stopped importing the meet," he said in a press conference on Sunday.
Currently, beef retails for about RM25 per kg domestically. Dr Kamarudin said this at the World
Veterinarian Day 2016 national-level celebration at the state veterinary department in Bandar Baru Uda
here. He said Malaysia produces about 52,000 tonnes of beef annually worth RM169mil, while demand
is about 191,000 tonnes.
Dr Kamarudin said Malaysia spent about RM1.14bil on importing beef, with 70% of the meat coming
from India and the balance from Australia, Bangladesh and Pakistan. He said if the country wanted to be
more self-sufficient in term of beef supply, Malaysia would need to slaughter 1.1 million heads of cattle
yearly, up from 200,000 heads currently.
Adapted from The Star, 15 May 2016
A) Define Supply
Supply refers to the quantity of goods and services that producers are willing and able to
provide at a given price and within a given period. It represents the relationship between the price of a
product and the quantity that producers are willing to sell. The supply curve is upward-sloping,
indicating that as the price of a product increases, the quantity supplied also increases, and vice versa.
Supply is influenced by factors such as input costs, technology, government regulations, and
expectations of future prices.

B) Using the supply and demand diagram, show what happens in the market for buffalo meat in
Malaysia if Malaysia decides to import buffalo meat from India.

P1

P2
\

Q1 Q2 QUANTITY SUPPLY
C) As stated in the third paragraph (line 3-4), "Malaysia produces about 52,000 tonnes of beef
annually worth RM169mil, while demand is about 191,000 tonnes". Based on the above statement, is
there a shortage or surplus of beef in Malaysia and by how much. Show the above situation in a well-
labelled diagram.
PRICE
supply

169mil maximum price/price ceiling

\ shortage demand

52,000 191,000 QUANTITY of BEEF

Shortage= Qs-Qd
= 52,000 – 191-000
= 139,000 units

D) Discuss any THREE (3) factors that can affect the supply of local beef.

1. The availability of land for cattle grazing and farming can limit the supply of local beef. If there
is a shortage of land or competition for land from other agricultural activities, the number of cattle that
can be raised and the amount of beef that can be produced will be limited.

2. The supply of local beef also depends on the availability and affordability of feed for the
cattle. If there is a shortage of feed or if the cost of feed increases, farmers may be unable to raise and
maintain a sufficient number of livestock for beef production, leading to a decline in supply.

3. Disease outbreaks among cattle can significantly impact the supply of local beef. Diseases can
spread quickly within a herd, leading to large-scale loss of livestock. In such cases, farmers may need to
cull infected animals or implement strict measures to control the spread of disease, which can result in a
decrease in the number of cattle available for beef production.
E) With aid of diagram, explain what happens to the supply of beef if the price of a substitute in
production (lamb) rises relative to its related product (beef).
Price Lamb (RM) S

P1

P0

Q0 Q1 Quantity lamb
(tonnes)

Price beef (RM)

S1
P1 S2

P0

Q1 Q0 Quantity lamb
(tonnes)

From the diagram of the lamb graph, when the price of the lamb increases from P0 to
P1. The quantity supplied of lamb rises from Q0 to Q1, and it will cause the producer who is in
charge of the production of beef will change the supply of beef to lamb because it will get a
higher price. From the diagram beef graph, the supply of beef will drop and it curve shifts to the
left from S0 to S1, so the price of beef will remain the same but the quantity of the beef
supplied will decrease from Q0 to Q1.