Monday, March 29, 2010

Reducing Output

In 2008, Alaska Airlines costs were rising due to higher jet fuel prices and the airline was facing fewer passengers due to the weakening economy. In response the airline was reducing its employees and also reducing its capacity (number of flights).

While this is an unfortunate event, we can use some of our tools from Prin. of Microeconomics to see why this happens. As the airlines costs increase, this shifts the marginal cost curve to the left and as the airline has fewer customers this is shifting the demand curve to the left. Both of these actions result in a decline in output, as predicted by the model. What is also predicted is that a decline in output and a reducing in their labor costs should reduce the losses incurred by the firm.

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