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It's Hard to 'Keep On Trucking'
Subject Short run and long run comparative statics
Topic Perfect Competition
Key Words Trucking industry, failures, costs, bankruptcy, prices, wages, economic slowdown, volumes, buyer's market, employment
News Story

The trucking industry's equivalent of the "Perfect Storm" is hitting many businesses. There are 400,000 companies in the industry, of which 3,670 failed in 2000, and another 1,155 failed in the first quarter of 2001, the worst annual rates ever. The movie "The Perfect Storm" recorded how several fierce weather fronts united to have a devastating effect. In the trucking industry, it was higher fuel costs, insurance and wages that combined to send companies into bankruptcy. Gasoline prices have since receded but are still one-third higher than in the summer of 1999. Insurance costs have risen 20 percent on average in one year. Drivers' wages are 15 percent higher than in 1998 - at 32 cents a mile in many companies. The economic slowdown has compounded the problem, reducing freight volumes by 2 to 5 percent in the last year.

However, bankruptcy provides little solace. It is a buyer's market for used trucks because the nation's truck fleet is its youngest in a decade, and 2000's failures resulted in 155,000 trucks flooding the market. Three-year old trucks are selling for $35,000, down from $45,000 a few years ago. Laid-off truckers are finding it difficult to regain employment
due to the economic situation.

The industry association economist predicts that if enough firms go under, trucking prices will rise eventually. Offsetting this, if more individuals are tempted by cheap trucks and trailers to enter the trucking industry, the increase in price may be moderated.

(Updated September 1, 2001)

Questions
1. In what ways does the trucking industry approximate perfect competition? Refer to the assumptions underlying perfectly competitive markets.
2. Assuming that the industry is perfectly competitive, draw a diagram of supply and demand in the trucking industry, and, at its side, another of a representative firm, showing the demand curve and the average total cost and marginal cost curve. Assume that the firm is initially breaking even. Mark the industry and firm equilibrium price and output.
a) Show the effect of higher wage, insurance and gasoline costs on the industry and firm equilibria in the short run.
b) Now show the additional effect of the economic slowdown.
c) What has happened to the amount of profit as a result of the cost and demand changes?
3. a) What is happening in the long run? Describe what is occurring to the curves in your diagram, and what the final equilibrium will look like.
b) Under what circumstances would individuals be willing to enter the industry?
Source Robert Johnson, "Record Number of Small Trucking Firms Are Folding", The Wall Street Journal, June 25, 2001.

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