What happens when an increase in supply is combined with a decrease in demand? In 2009 the cruise industry invested $4.7 billion on 14 new ships, and in 2010 the industry launched 12 additional new ships. While the supply of cruise berths increased, the demand for cruises decreased a result of a recession and lower real income. As shown in Figure the simultaneous increase in supply and decrease in demand decreased the equilibrium price. To entice consumers, some cruise lines cut prices by as much as 40 percent. Although consumers responded by purchasing more cruises (about 3 percent more in 2009 than in 2008), the cruise lines revenues decreased. For Carnival Corporation, the world s largest cruise line, total revenue decreased by 10percent.

Initial supply New supply Initial demand New demand N N2 Number of passengers