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École Nationale de l'Aviation Civile

Skip to 0 minutes and 8 secondsLet's talk about supply. If demand for tomatoes, coffee, beer and cars, for example, is to be satisfied, we need producers. The traditional way to represent supply and demand looks like this. Demand is a downward sloping curve plotting quantity demanded against price. Supply is an upward sloping curve plotting quantity produced against price. Although it works in situations where we have many consumers and many producers, like in the tomato, coffee, beer and car markets, it is not going to be of much use to us. In industries where revenue management applies, there are

Skip to 0 minutes and 54 secondsspecific conditions: First, there may often be a single producer of a particular good or service on a market (which is called a monopoly), or there may only be a few producers. This makes it possible for them to set their own prices. Economists say that they benefit from market power.

Skip to 1 minute and 19 secondsThe good or service produced is usually perishable. If not sold, it cannot be stored and is wasted.

Skip to 1 minute and 27 secondsThink about a plane ticket, for example: if not sold before the flight takes off, its value drops to zero.

Skip to 1 minute and 35 secondsFinally, there may also often be some capacity limits in those industries, meaning that the producer or producers cannot increase production above a certain level at any given time. Think, for example, about the capacity of a hotel or an aircraft.

Skip to 1 minute and 55 secondsTo sum up: in industries where revenue management is applicable, you will find a limited number of producers, producing a perishable good or providing a perishable service, with capacity limits.

Skip to 2 minutes and 10 secondsIn those markets, the main constraint that the producer has to take into account is the demand curve.

Skip to 2 minutes and 16 secondsImagine there is only one producer: If he sells his goods at a certain price, then he should produce the quantity

Skip to 2 minutes and 25 secondsthat puts him ON the demand curve: Being under the demand curve means that the producer could have sold his product at a higher price. His revenues could have been higher. Being above the demand curve means that not all the producer’s products will be sold. So, part of the production is wasted as it cannot be stored

Skip to 2 minutes and 52 secondsProducers in this type of industry are both lucky and cursed: They are lucky because a producer in a situation like this has very few pricing constraints, But cursed because they will have to find the right price to sell. So, in those industries, producers need to understand some economics in order for their businesses to succeed! What does success mean? Staying in the market, which means not losing money. But more than that, producers will try to maximise their profit and, in the short run, they will try and find the right price, or the right prices, to do so.

Take a walk on the supply side

To satisfy demand, the market needs suppliers.

In industries where revenue management is used, there are often a limited number of suppliers on a market. Classical economic principles do not apply to determine prices.
Let’s explore the supply side in this context: how do demand and supply interact?

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