Market structure — practice question

For many years, low-cost airlines have been vying on short-haul routes not only with traditional airlines, but also with rail services and road transport by car. They are now beginning to compete with traditional airlines on long-haul routes as well. Because competition has intensified, some horizontal mergers have taken place among the traditional airlines. By 2030, China is forecast to become the largest domestic air travel market in the world, accounting for 20% of total global air travel. At present, the USA is the leading market, and it is predicted that from 2015 to 2030 the country will order 6160 of the 28000 passenger aircraft that are expected to be produced. India, where airlines are both state-owned and privately owned, is seeing a very large rise in domestic flights and international flights. More airports are being constructed in India, together with extra facilities in and around them. For instance, more taxi firms are being established to transport passengers to and from airports. The fast growth of air travel in India and in other countries is affecting the labour market for pilots, as shown in Fig. 1. Fig. 1 The market for pilots. The vertical axis is labelled "price of pilots" and the horizontal axis is labelled "quantity / number of pilots". The origin is labelled "O". Two equilibrium prices are shown, labelled $P_1$ and $P_2$. Two quantities are shown, labelled $Q_1$ and $Q_2$. A supply curve labelled "S" slopes upwards from left to right. Two demand curves are shown, labelled $D_1$ and $D_2$, both sloping downwards from left to right. $D_2$ is to the right of $D_1$. The speed at which the Indian air travel market expands will depend on several influences. These include how far business travel grows and the pace at which demand for overseas holidays rises. Demand for these types of air travel has, in turn, been affected by price changes. The price elasticity of demand for air travel has been estimated at $-1.2$. One factor affecting prices, and therefore the inflation rate, is changes in taxation.