Question

Microeconomics, Market Behavior: A recent announcement from airlines stated that there will be a large layoff of airline workers in almost every occupation. If the demand for airline travel does not change (an assumption) what will be the affect on airline ticket prices and the amount of air travel by consumers?

Answer 1

Due to lay offs the the airline staff will be reduced. As a result the supply of airline workers will reduce. This will reduce the supply of airline travel. This will shift the supply curve towards left. But assuming the demand for airline travel remains same, the quantity demanded of airline travel will exceed the quantity supplied. This will result in to shortage. This shortage will put upward pressure on price and equilibrium price of airline tickets will increase. The new supply curve will intersect the demand curve at new equilibrium point. At this equilibrium point, equilibrium price of airline tickets will rise and equilibrium quantity will decrease. Thus amount of air tarvel by consumers will reduce.

Due to lay off the supply curve will shift leftward from SS to S1S1. It will intersect the demand curve DD of air travel at new equilibrium point, E1. At E1, the equilibrium price will rise from P to P1 and equilibrium quantity of air travel will reduce from Q to Q1.