The effect of the Brussels bombs

We all know that demand and supply determine prices, but that a change in a condition of demand will alter the market equilibrium. One possible change in the conditions of demand is a random shock, and the Brussels bombing is an unfortunate example.

There have been similar events, such as 9/11 and the Bali bombings, when similar effects were seen and investors have been the first to react by dumping shares in tourism sector firms such as airlines, cruise lines and tour operators.

Following 9/11 the demand for air travel plummeted. People didn't want to risk flying. Not everyone, but quite a few people decided not to take trips. After the Bali bombings many Australians decided that Queensland was a better option.

The effect of this was to shift the demand curve for flights and holidays to the left. The result was a fall in the market price (from 0P1 to 0P2) as firms reacted to a situation of excess supply and fewer flights and holidays taken (Q1 - Q2 fewer).

Following the Brussels bombing shares in many tourist sector companies fell. They anticipated the fall in profits that tourist sector companies were going to earn over the next period and decided the shares were not worth as much as before the bombing. Europe will have some spare hotel rooms and flights will have some spare seats for a while.

The Guardian reports the fall in share prices here

This article is relevant to the application of supply and demand to both VCE and IB students.