The Principle of Market Equilibrium

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Devin Bunten 828.008.840 As costs rise, airlines cut services and raise fares International Herald Tribune Micheline Maynard Friday, June 6th, 2008 www.iht.com/articles/2008/06/06/business/air.php The Principle of Market Equilibrium

The equilibrium price is the price at which the quantity demanded of a good or service is equal to the quantity supplied. The Principle of Market Equilibrium states that perfectly competitive markets are always moving toward said equilibrium. If the price is too high or low, there will be a surplus or shortage, respectively, which will drive the price towards the “market-clearing” equilibrium price. When there is a shift of the demand and/or supply curves, the market will adjust by finding a new equilibrium price. Such is the case in the airline industry, where a decrease in supply has led to a rise in the equilibrium price and a fall in the equilibrium quantity. Costs in the airline industry, as in many industries at present, are rising, largely due to an increase in the costs of inputs. The cost of fuel this summer is “almost double” what it was last summer. This has led to a shift inward of the supply curve for the airline industry; that is, at any given price, airlines will now supply fewer flights. This has been made tangible by the announcements since March that the industry will be retiring more than two hundred aircraft. However, a shift inward of the supply curve is also a shift upward, and airlines are following this stricture of economics as well: various airlines have begun charging between fifteen and twenty-five dollars to check bags, that is, the price has gone up for a service that was once offered at a lower cost to consumers. However, the movement of the supply curve is only half the story. For the purposes of this essay, the assumption is that the demand curve has not moved, however, there has certainly been movement along the demand curve. In addition to the aforementioned

changes, airlines are simply...
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