>> So what does the
market for oil have to do

with your vacation plans?

Think of the market
for airline tickets

to a vacation destination.

Travelers represent the demand,

while airlines represent
the supply.

For each route, the market
generates an equilibrium price

-- the airfare -- and an
equilibrium number of flights.

Now, suppose that for some
reason the price of oil goes up,

which makes jet fuel
more expensive.

At any given airfare,
the airline can't afford

to run as many flights.

And for a given number
of flights,

it costs the airline more.

Either way you think about it,
this shows up as a shift inwards

for the supply of
airline flights,

because the price
of an input rose.

The airfares rise and the
number of flights fall.

This shows how changes in
prices reflect what is going

on in the real world.

Airline executives
didn't suddenly wake

up feeling more greedy
and raise the airfares.

The airfares went up
because of the increase

in the price of jet fuel.

You might be thinking, hey, with
airlines running fewer flights,

don't we also need to
shift demand inwards, too?

Remember, we haven't changed
the number of potential fliers.

We haven't changed their income

or the inherent usefulness
of flying in a plane.

So we don't shift demand.

We do see fewer people flying,
but that's because with the rise

in the price, we hit a
move-along on the demand curve.

Likewise, we can think about
what happens if the price

of oil falls, making
jet fuel cheaper.

This shows up as a shift
outwards in the supply

of airline flights because
the price of an input fell.

The price of airline
tickets falls

and the number of flights rises.

It is not like airline
executives woke

up feeling more generous
and cut prices.

Their costs fell.

And if they hadn't passed
along those savings,

they would have lost customers
to their competitors who did.

Again, without a change in
the number of potential flyers

or their incomes or
their preferences,

we don't see a shift in demand.

With the fall in prices, we
see a move-along on demand

and we have more
travelers flying

on those additional flights.