ELM #12 Gas Prices

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Module-12
G as prices :
Supply and demand analysis
TEACHER’S GUIDE
P. 363Defined
P. 364Content standards
P. 365Materials
P. 365Procedure
P. 371Lesson outline
P. 372Closure
P. 372Assessment
P. 375Overheads
Visuals N
Visuals for overhead projector.
Copy to transparent paper for overhead.
P. 376NVisual-1: Demand for gas
P. 377NVisual-2: Supply of gas
P. 378NVisual-3: Price ceiling
P. 379NVisual-4: Shortage
P. 380 NVisual-5: Price gouging
P. 381NVisual-6: Supply and demand for gasoline
Lessons 2
Copy and handout to students.
P. 3842 Lesson-I: Gas price
P. 3892 Lesson assessment
Gas prices
Supply and demand analysis
Module-12
Teacher
DEFINED
Gasoline accounts for 17% of the energy consumed in the United
States, primarily used in automobiles and light trucks. Gasoline prices
have increased over 60% between 2005 and 2007. This dramatic price
increase drew the attention of both politicians and the general citizenry.
Furthermore, profits from oil companies refining crude oil into gasoline
reached record highs. This led to charges of price gouging. Price gouging
is when a seller charges more than a fair price for a good or service.
The table below compares the cost of producing gasoline in 2004
and 2005. Notice that refinery costs and profits have increased by $.10
per gallon which is less than 25% of the total price increase. The major
contributor to the price increase was the rise in the cost of crude oil,
an input into gasoline production. While the $.10 increase from the
refinery may include a substantial increase in profits, crude oil cost is
obviously having more influence on gasoline prices. As is often the case
with economic phenomena, multiple forces affect the price and quantity
of the product sold, including hurricanes, war, taxes, and seasons.
The economic concepts of supply and demand were introduced
in previous modules. This Hot Topic Module will emphasize the
importance of understanding the functions of supply and demand, how
they change, and the impact of those changes using gasoline and the
factors that affect gasoline prices at the pump.
production
cost of gasoline
difference
2004
2005
distribution and
marketing
.022
.020
-0.02
refinery cost and
profits
0.33
0.43
0.10
taxes
0.43
0.43
0.00
crude oil
0.87
1.21
0.34
1.85
2.27
0.41
retail price
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
363
Gas prices
Supply and demand analysis
Module-12
Teacher
CONCEPTS
1.
2.
3.
4.
5.
6.
Supply; change in supply, change in quantity supplied
Demand; change in demand, change in quantity demanded
Price gouging
Entrepreneurship
Price ceiling
Market equilibrium
OBJECTIVES
1. Understand the concepts of supply, demand, and equilibrium.
2. Realize that multiple factors affect the price of gasoline (and other
commodities).
3. Realize that price sends signals to producers and consumers.
4. Understand that entrepreneurs are people who take the risks of
organizing productive resources to make goods and services.
CONTENT STANDARDS
National Content Standards in Economics
1. (Standard 1) Productive resources are limited. Therefore, people
cannot have all the goods and services they want; as a result, they
must choose some things and give up others.
2. (Standard 3) Different methods can be used to allocate goods and
services.
3. (Standard 4) People respond predictably to positive and negative
incentives.
4. (Standard 5) Voluntary exchange occurs only when all participating
parties expect to gain.
5. (Standard 7) Markets exist when buyers and sellers interact.
6. (Standard 8) Prices send signals and provide incentives to buyers
and sellers.
7. (Standard 9) Competition among sellers lowers costs and prices,
and encourages producers to produce more of what consumers
are willing and able to buy.
8. (Standard 14) Entrepreneurs are people who take the risks of
organizing productive resources to make goods and services.
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Gas prices
Supply and demand analysis
Module-12
Teacher
Montana Social Studies Content (Standard 5)
1. (Benchmark 1) Identify and explain basic economic concepts.
2. (Benchmark 2) Use basic economic concepts to explain current and
historical events.
3. (Benchmark 5) Explain and illustrate how money is used by
individuals and groups.
4. (Benchmark 6) Understand the effects of new technology, global
interdependence, and competition on individuals and the
development of national policy.
TIME REQUIRED
1-2 class periods
MATERIALS
Overhead projector
Transparency pen
NVisuals for overhead projector: Copy to transparency.
NVisual-1: Demand for gasoline
NVisual-2: Supply of gasoline
NVisual-3: Price ceiling
NVisual-4: Shortage
NVisual-5: Price gouging
NVisual-6: Supply and demand for gasoline
Lesson worksheets: Copy for each student:
2 Lesson-I: Gasoline price
2 Lesson assessment
PROCEDURE
1. Talk with students about the price of gasoline at the pump.
LQuestion: Do students believe the price of gasoline is too high?
Why?
LQuestion: Do they believe the price of gasoline is too low? Why?
Display NVisual-1: Demand for Gasoline.
Answer: Remind students that the quantity consumed reflects the
price at the pump. When the price is higher the quantity consumed is
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365
Gas prices
Module-12
Teacher
Supply and demand analysis
less. Demonstrate this with a leftward movement along the demand
curve. A lower price encourages more consumption. Show students
this rightward movement along the demand curve on the visual.
Remember, a fluctuation in price results in a change in quantity
demanded and is shown as a movement along the curve.
2. Discuss with students the fact that gasoline accounts for 17% of
the energy consumed in the United States. It is primarily used in
automobiles and light trucks. Other energy sources include hydro
power and coal.
3. Display NVisual-2: Supply of gasoline. Remind students that as price
increases, producers are willing to increase the quantity supplied.
This can be shown as a rightward movement along the supply
curve. Of course a decrease in price will decrease the quantity that
producers are willing to supply, shown as a leftward movement along
the supply curve.
4. Talk for a moment about the role of entrepreneurs. Entrepreneurs
(producers) are people who take risks by organizing productive
resources to make goods and services. They take risks because they
believe they will receive profits in return.
5. Now demonstrate what happens if the price of gasoline is held
artificially low through the use of a price ceiling. This is shown in
NVisual-3: Price ceiling for gasoline. A price ceiling is a government
mandated maximum price designed to keep the product affordable.
It is illegal to charge above the price ceiling. Use your hand to show
a ceiling that cannot be pushed up. A price ceiling can be compared
to the below equilibrium wage for babysitters demonstrated
in Module-9: Equilibrium. When price is held artificially low,
consumers of gasoline, like parents when babysitting wages were
low, want to purchase more than is available in the market. The
quantity demanded is then determined by the point where the price
intersects the demand curve.
Producers, comparable to the babysitters in Module 9, would not
be willing to provide as much or to invest in future development.
The quantity supplied will be the quantity determined by the point
where the price ceiling intersects the supply curve. In order for a price
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Gas prices
Supply and demand analysis
Module-12
Teacher
ceiling to be effective, it must be set below the market equilibrium
price. (This is confusing to some students.) The ceiling is below the
equilibrium price. If it were above, the market equilibrium price
would be charged and the price ceiling would be ineffective. In
the early 1970s the U.S. government imposed a price ceiling on
gasoline. You may recall the long lines that resulted. Gasoline lines
in California reached five miles long.
6. Display NVisual-4: Production. Walk students through the production
process. Gasoline is refined from crude oil usually at large refineries
and then distributed through pipelines for eventual sale through
about 170,000 gasoline stations throughout the United States. The
prices paid at the pump reflect the cost of producing gasoline and
taxes. Gasoline prices increased over 60% between 2005 and
2007.
7. Remind students that profits can be calculated by subtracting total
costs (TC) from total revenues (TR). Total revenues (TR) are the price
charged (P) times the quantity consumed (Q). The recent gasoline
price increases have resulted in increased profits for oil companies.
In fact, profits from oil companies that transform crude oil into
gasoline have been at record highs. This has led to charges of price
gouging.
Total Revenues = Price x Quantity
TR = P x Q
Profit = Total Revenue-Total Cost
Profit = TR-TC
8. Display the top half of NVisual-5: Price Gouging. Discuss the
concept with students. price gouging is a pejorative term used to
describe high prices seen as ‘unfair’ that may lead to excessive profits
for the seller.
LQuestion: Are gasoline producers price gouging?
Answer: Not necessarily. Remember, that for a transaction to take
place, both seller and buyer must agree to the trade, hence both
parties perceive gains. It may seem unfair, for example, to sell a
house for $30,000 more than the purchase price a few years prior,
but market conditions have likely changed.
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Teacher
LQuestion: Ask students if they believe that it is price gouging when
the price of gasoline rises before a summer holiday? Why or why
not?
Answer: Some may perceive this as price gouging, others not. With
nearly 170,000 gasoline stations across the nation it is unlikely that
gasoline stations are gouging. (It is illegal in the United States for
competitors to agree upon a sales price.)
LQuestion: If it is assumed that price gouging is occurring, is
government price setting (a price ceiling) going to resolve the
problem?
Answer: As demonstrated before, a price ceiling encourages
increased consumption and will discourage producers from investing
in future supplies which is likely to exacerbate the problem.
9. Uncover the table on the bottom half of NVisual-5: Price gouging.
The table compares the cost of producing gasoline in 2004 and
2005. Notice that refinery costs and profits have increased by $.10
per gallon. This is less than 25% of the total price increase. Discuss
the other factors that have contributed to the increase in gasoline
price. The major contributor is the increase in the cost of the crude
oil, an input into gasoline production. While the $.10 increase from
the refinery may include a substantial increase in profits, crude oil
cost is obviously having more influence on gasoline prices. As is
often the case with economic phenomena, multiple forces affect the
price and quantity of the product sold. Supply and demand concepts
help us understand each of these influences. The topics that relate
to gasoline prices are innumerable.
10.The following ten issues are just some of the factors that influence
gasoline price. Using NVisual-6: Supply and demand for gasoline,
graphically illustrate the market impacts of each influence on
gasoline price and quantity. You may wish to show two different
changes on the same graph to demonstrate the combined effects.
a Hurricane Katrina: In late August of 2005, Hurricane Katrina
devastated the western United States coast of the Gulf of
Mexico. The hurricane area covered about 25% of US crude
oil production and over 10% of the United States refining
capacity. Pipelines and other distribution systems were
damaged and operating at reduced levels. Days after the
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Gas prices
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Teacher
Supply and demand analysis
hurricane, emergency energy reserves were released. Katrina
decreased supply causing the supply curve to shift to the left
and increasing price (this would cause a decrease in quantity
demanded). The release of the emergency reserves then shifted
the supply curve to the right partially compensating for the
losses due to Katrina.
b.Iraq War: More than 2 million barrels of oil production per day
came from Iraq before the United States intervention. In 2003,
the year of the intervention, oil production dropped to 1.3
million barrels per day. The immediate response was a leftward
shift of the supply curve for gasoline resulting in a higher price
and lower quantity of gasoline. Over time, the supply curve has
increased, shifting to the right. Today, about the same amount
of oil is produced in Iraq as before intervention. It is likely that
without intervention the supply of oil would be even greater
today and the supply curve for gasoline would be further to the
right resulting in lower gasoline prices. It has been predicted
that Iraq’s production could reach 9 million barrels per day by
2012 with the development of a new oil field in northern Iraq.
This would shift the supply curve for gasoline further to the
right.
c.Rapid economic growth in China: For the last several years
incomes in China have been increasing around 10% per year.
This prolonged rapid growth in China has almost continuously
increased the worldwide demand for gasoline. Show a series of
rightward shifting demand curves with the resulting increasing
prices. (Note that the quantity supplied will also continue to
increase.)
d.United States refinery capacity: The last major refinery built in
the United States was constructed in 1978. Federal and state
policies have increased the expense and time to build new
refineries. However, since 1978, income (purchasing power)
has increased substantially and population has increased by
about a third. How will the United States meet its future energy
needs? The supply from U.S. refineries has not changed; U.S.
refinery capacity has not changed. U.S. policies and other
factors have prevented the supply curve from shifting to the
right. The increases in both income and population have shifted
demand to the right. This causes price to increase and the
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Supply and demand analysis
quantity supplied to increase. Of course, the quantity supplied
can only increase with imports since U.S. refinery capacity
has remained constant. The additional supplies that come
from abroad come at a higher cost because of the high costs
of transporting refined products. This causes the supply curve
to shift farther left than would have occurred with domestic
production.
e.Environmentally sensitive potential oil production regions:
Oil drilling and production has been barred from the Arctic
National Wildlife Refuge (ANWR), a National Wildlife Refuge
in northeastern Alaska, and other areas of the United States.
These areas have been considered environmentally important
and particularly sensitive to adverse impacts from drilling.
Demonstrate the effect of restricted drilling on the quantity and
price of gasoline. The restrictions have the potential to reduce
the supply if slowing production in one area cannot be met
with increased production in another. This would be shown
as a leftward shift in supply causing price to increase and the
quantity demanded to decline.
f. Phase out of MTBE (methyl tertiary butyl ether) is a gasoline
additive that enhances octane (gasoline mileage) and reduces
emissions. However, MTBE is a threat to groundwater quality
and therefore poses a potential liability. MTBE is being phased
out and replaced with other additives. If these replacement
additives are more expensive what will happen to the gasoline
market? The increased cost of gasoline additives increases the
cost of production, hence shifting the supply curve to the left.
Price will also rise and quantity demanded will decline.
g.Development of mass transit: With the higher price of gasoline,
there has been discussion of the expansion of mass transit
systems in larger metropolitan areas and the development of
systems in areas without current mass transit. If mass transit is a
substitute for private vehicles it could help reduce the demand
for gasoline. This would be shown as a leftward shift of the
demand, price would decline and the quantity supplied would
decline.
h.Ethanol production: The Federal and some state governments
provide substantial subsidies to produce ethanol from corn
or other agricultural products. The ethanol is mixed with
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Gas prices
Supply and demand analysis
Module-12
Teacher
gasoline thereby replacing a portion of the gasoline. Specially
designed cars may use mixtures of up to 85% ethanol. Ethanol
helps replace a portion of the gasoline. Every else constant,
this would shift the demand for gasoline to the left. However,
ethanol production requires the use of energy, often in the form
of gasoline. Hence, the production of ethanol alone, would
shift the demand for gasoline to the right. The end result putting
the two changes together would depend upon which shift is
larger.
i. Coal: Substantial electricity is produced from crude oil that
could be used to produce gasoline. Development of known
United States coal reserves has been hampered by a variety
of environmental regulations and policies. How would less
restrictive policies on coal development affect the gasoline
market? If more coal was available for electricity production
this would decrease the demand for crude oil lowering
its price. A lower price for crude oil, an input in gasoline
production, would cause a rightward shift of the gasoline
supply curve. In turn, this would decrease the price of gasoline
and increase the quantity demanded.
j. Government Price Controls: Around the world many nations
have moved toward a market based economy. Previously,
prices were set by their governments. Usually these prices
were set lower than what the market price would have been
if allowed to reflect the true price for gasoline. Price ceilings
that restrict a price below its market price encourage a greater
quantity demanded than the equilibrium level and a lower
quantity supplied.
LESSON Outline
Lesson-I: Gasoline Price
The lesson includes ten more issues that will have an impact on
gasoline prices. Either in class or as a take home assignment, have
students draw the change in supply, demand, and/or price for each
issue. The issues follow:
a.Development of wind energy
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Supply and demand analysis
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Teacher
b.Development of fuel efficient cars
c.Increased political squabbles between nations
d.New technology to produce oil from cattle and hog manure
e.Land use planning to restrict urban sprawl
f. Instability in Iran
g.9/11 attack lowers incomes
h.Federal, state, and local taxes on gasoline
i. Alaskan pipeline repair
j. Exxon Valdez oil spill
CLOSURE
Review the lesson by asking the following questions:
1. LQuestion: Why do gasoline prices change?
Answer: There are many factors that influence the price of gasoline.
These include supply shocks like Hurricane Katrina, and demand
shocks like a heat wave. Changes in the costs of production, changes
in consumer income, and changes in technology are a few more.
2. LQuestion: Are gasoline companies price gouging?
Answer: Generally, gasoline companies charge the market rate for
gasoline. The fact that other circumstances have changed has led to
an increase in profits for gasoline refineries. This rise in profitability
has also encouraged more research and development in gasoline
resources which should lead to increased supply in the future.
ASSESSMENT
Multiple-choice questions
1. LQuestion: What determines the price of gasoline charged at the
pump?
a.Many factors influence the price of gasoline.
b.Producers negotiate to determine the best price for all to
charge.
c.The limited supply of gasoline. Because it is limited the price
will always increase.
d.Taxes are the overriding factor affecting gasoline prices.
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Gas prices
Supply and demand analysis
Module-12
Teacher
2. LQuestion: Hurricane Katrina caused a/an:
a.decrease in the price of gasoline resulting from a decrease in
supply.
b.increase in the price of gasoline resulting from a decrease in
supply.
c.increase in the quantity demanded from an increase in supply.
d.increase in the price of gasoline resulting from an increase in
supply.
3. LQuestion: What is likely to happen to gasoline prices as a result
of rapid economic growth in China?
a.An increase in price as a result of increased demand.
b.A decrease in price as a result of a decrease in demand.
c.An increase in price as a result of an increase in supply.
d.A decrease in price as a result of a decrease in supply.
4. LQuestion: Which of the following will likely occur as the result
of new technologies and alternative fuels that are competitive with
the price of gasoline?
a.An increase in the demand for gasoline.
b.A decrease in the demand for gasoline.
c.An increase in the supply of gasoline.
d.An increase in the quantity supplied of gasoline.
5. LQuestion: How will consumers respond to a dramatic increase
in gasoline price?
a.There will be an increase in quantity demanded.
b.There will be a decrease in quantity demanded.
c.There will be an increase in demand.
d.There will be a decrease in demand.
Answers:
1.
2.
3.
4.
5.
a
b
a
b
b
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Supply and demand analysis
Module-12
Teacher
Discussion/essay questions
1. LQuestion: Are gasoline prices likely to increase or decrease in
the future? Explain.
Answer: In a world full of uncertainty gasoline prices are likely
to continue to fluctuate. Natural disasters like Hurricane Katrina,
conflicts in high oil producing regions, and restrictive regulations will
put upward pressure on price. Alternative fuel sources like ethanol,
solar, and wind power have the potential to reduce demand for
gasoline putting downward pressure on price.
2. LQuestion: Alternative fuels like wind and solar power are developing
at a rapid pace. As these fuels become competitive with gasoline,
what is the likely impact on the supply and demand of gasoline?
Answer: Alternative fuels would be a substitute for gasoline. As
these fuels become cheaper consumers will shift away from gasoline,
decreasing the demand for gasoline. This will cause a decrease in
price and a decrease in the quantity supplied.
NOTES
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Module-12
O ver h ead
visuals
Gas prices
Gas prices
Supply and demand analysis
Module-12
Visual
Visual-1: demand for gasoline
a change in quantity
demanded: a movement
along the demand curve
in response to a change
in price.
p = price q = quantity d = demand
N376
Gas prices
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Visual
Supply and demand analysis
Visual-2: SUPPLY of gasoline
a change in quantity supplied: a
movement along the supply curve
in response to a change in
price.
p = price q = quantity d = demand
N377
Gas prices
Supply and demand analysis
Module-12
Visual
Visual-3: price ceiling for gasoline
price ceiling a maximum price that can be charged for
goods or services.
p = price
N378
q = quantity
d = demand
S = SUPPLY
Gas prices
Supply and demand analysis
Module-12
Visual
Visual-4: Shortage
1. pumping the crude oil
from the ground.
2. transporting the
crude oil to the
refinery
3. refining the crude
oil into gasoline, diesel,
motor oil, etc.
4. transporting the
gasoline to service
stations
5. selling the gasoline
to consumers
remember
N379
Gas prices
Supply and demand analysis
Module-12
Visual
Visual-5: price gouging
production
cost of gasoline
difference
2004
2005
distribution and
marketing
.022
.020
-0.02
refinery cost and
profits
0.33
0.43
0.10
taxes
0.43
0.43
0.00
crude oil
0.87
1.21
0.34
1.85
2.27
0.41
retail price
N380
Gas prices
Supply and demand analysis
Module-12
Visual
Visual-6: supply and demand for gasoline
illustrates the market
impact on gasoline
price and quantity.
p = price
q = quantity
d = demand
S = SUPPLY
N381
Gas prices
Supply and demand analysis
Module-12
Teacher
NOTES
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___________________________________________________
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___________________________________________________
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Module-12
L es s on
w o r ks heets
Gas prices
Gas prices
Supply and demand analysis
Module-12
Lesson
Lesson-I: Gas Price
Using the following supply and demand diagrams illustrate how each factor will affect the price of gasoline
and quantity consumed. Label any new curves, changes in price, and changes in equilibrium quantity.
1. Development of wind energy
P
(price
per
gallon)
S1
P1
D1
Q1
Q
(gallons)
2. Development of fuel efficient car
P
(price
per
gallon)
S1
P1
D1
Q1
384 2
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Q
(gallons)
Gas prices
Supply and demand analysis
Module-12
Lesson
Lesson-I: Gas Price
3. Increased political squabbles between nations
P
(price
per
gallon)
S1
P1
D1
Q1
Q
(gallons)
4. New technology to produce oil from cattle and hog manure
P
(price
per
gallon)
S1
P1
D1
Q1
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Q
(gallons)
2385
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Supply and demand analysis
Module-12
Lesson
Lesson-I: Gas Price
5. Land use planning to restrict urban sprawl
P
(price
per
gallon)
S1
P1
D1
Q1
Q
(gallons)
6. Instability in Iran
P
(price
per
gallon)
S1
P1
D1
Q1
386 2
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Q
(gallons)
Gas prices
Supply and demand analysis
Module-12
Lesson
Lesson-I: Gas Price
7. 9/11 Attack lowers incomes
P
(price
per
gallon)
S1
P1
D1
Q1
Q
(gallons)
8. Federal, state, and local taxes on gasoline
P
(price
per
gallon)
S1
P1
D1
Q1
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Q
(gallons)
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Supply and demand analysis
Module-12
Lesson
Lesson-I: Gas Price
9. Alaskan pipeline repair
P
(price
per
gallon)
S1
P1
D1
Q1
Q
(gallons)
10. Exxon Valdez oil spill
P
(price
per
gallon)
S1
P1
D1
Q1
388 2
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Q
(gallons)
Gas prices
Supply and demand analysis
Module-12
Lesson
Lesson assessment
Multiple-choice questions
1. LQuestion: What determines the price of gas charged at the pump?
a.Many factors influence the price of gasoline.
b.Producers negotiate to determine the best price for all to charge.
c.The limited supply of gasoline. Because it is limited the price will always increase.
d.Taxes are the overriding factor affecting gas prices.
2. LQuestion: Hurricane Katrina caused a/an:
a.Decrease in the price of gas resulting from a decrease in supply.
b.Increase in the price of gas resulting from a decrease in supply.
c.Increase in the quantity demanded from an increase in supply.
d.Increase in the price of gas resulting from an increase in supply.
3. LQuestion: What is likely to happen to gas prices as a result of rapid economic growth in
China?
a.An increase in price as a result of increased demand.
b.A decrease in price as a result of a decrease in demand.
c.An increase in price as a result of an increase in supply.
d.A decrease in price as a result of a decrease in supply.
4. LQuestion: Which of the following will likely occur as the result of new technologies and
alternative fuels that are competitive with the price of gas?
a.An increase in the demand for gas.
b.A decrease in the demand for gas.
c.An increase in the supply of gas.
d.An increase in the quantity supplied of gas.
5. LQuestion: How will consumers respond to a dramatic increase in gas price?
a.There will be an increase in quantity demanded.
b.There will be a decrease in quantity demanded.
c.There will be an increase in demand.
d.There will be a decrease in demand.
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
2389
Gas prices
Supply and demand analysis
Module-12
Lesson
Lesson assessment
Discussion/essay questions
1. LQuestion: Are gas prices likely to increase or decrease in the future? Explain.
2. LQuestion: Alternative fuels like wind and solar power are developing at a rapid pace. As these
fuels become competitive with gasoline, what is the likely impact on the supply and demand
of gasoline?
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Gas prices
Supply and demand analysis
Module-12
Answer
Lesson-I: Answer Key
Using the following supply and demand diagrams illustrate how each factor will affect the price of gasoline
and quantity consumed. Label any new curves, changes in price, and changes in equilibrium quantity.
1. Development of wind energy
Answer: When alternative fuels become price competitive with gasoline the demand for gas
will decrease. The alternative fuels are a substitute for gasoline. The result is a decrease in price
and a decrease in quantity supplied.
P
(price
per
gallon)
S1
P1
P2
Q 2 Q1
D2
D1
Q
(gallo ns)
2. Development of fuel efficient car
Answer: As consumers begin to buy more fuel efficient cars, everything else constant, they
will consume less gasoline. The outcome of this alone will be a decrease in the demand for gas,
a decrease in price, and a decrease in quantity supplied. Evidence shows, however, that as
consumers realize they can drive further on a gallon of gas they begin to drive more. Each mile
driven is relatively cheaper than before. As a result the decrease in demand for gas may not be
as much as expected.
P
(price
per
gallon)
S1
P1
P2
Q 2 Q1
D2
D1
Q
(gallo ns)
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
2391
Gas prices
Supply and demand analysis
Module-12
Answer
Lesson-I: Answer Key
3. Increased political squabbles between nations
Answer: The answer here, of course, depends upon the circumstances among the squabbling
nations. The difficulties in the Middle East, however, have had an impact on gas price. More than
2 million barrels of oil production per day came from Iraq before the United States intervention,
for example. In 2003, the year of the intervention, oil production dropped to 1.3 million barrels
per day. The immediate response was a leftward shift of the supply curve for gasoline resulting
in a higher price and lower quantity demanded of gasoline. Over time, the supply curve has
increased, shifting to the right. Today about the same amount of oil is produced in Iraq as before
intervention. It is likely, that without intervention, the supply of oil would be even greater today
and the supply curve for gasoline would be further to the right resulting in lower gas prices. It
has been predicted, that Iraq production could reach 9 million barrels per day by 2012 with the
development of a new oil field in northern Iraq. This would shift the supply curve for gasoline
further to the right.
P
S2
(price
per
gallon)
S1
P2
P1
D1
Q 2 Q1
Q
(gallo ns)
4. New technology to produce oil from cattle and hog manure
Answer: When alternative fuels become price competitive with gasoline the demand for gas
will decrease. The alternative fuels are a substitute for gasoline. The result is a decrease in price
and a decrease in quantity supplied.
P
(price
per
gallon)
S1
P1
P2
Q 2 Q1
D2
D1
Q
(gallo ns)
392 2
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Gas prices
Supply and demand analysis
Module-12
Answer
Lesson-I: Answer Key
5. Land use planning to restrict urban sprawl
Answer: Everything else constant, if people desired to drive less as a result of more convenient
and accessible goods nearby, they would also desire less of the complements to driving, such as
gasoline. Demand for gas would decrease, shown by a shift to the left. Prices would decline and
the quantity supplied would also fall.
P
(price
per
gallon)
S1
P1
P2
Q 2 Q1
D2
D1
Q
(gallo ns)
6. Instability in Iran
Answer: Iran is one of the world’s gas giants. Decreased production in Iran would result in a
decrease in the supply of gas, a leftward shift. Price would increase and the quantity demanded
would decline.
P
S2
(price
per
gallon)
S1
P2
P1
D1
Q 2 Q1
Q
(gallo ns)
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
2393
Gas prices
Supply and demand analysis
Module-12
Answer
Lesson-I: Answer Key
7. 9/11 Attack lowers incomes
Answer: A decline in income causes a decrease, or leftward shift, of the demand curve. As a
result price will also fall and the quantity supplied will decrease.
P
(price
per
gallon)
S1
P1
P2
Q 2 Q1
D2
D1
Q
(gallo ns)
8. Federal, state, and local taxes on gasoline
Answer: A tax on producers will result in a leftward shift, a decrease, of the supply curve. Price
will increase and quantity demanded will fall. The new market price will be P2. The producer
must then pay the per unit tax which is equal to the vertical distance between the old supply
(S1) and the new supply curve (S2), or the difference between P2 and P3. Both the producer
and the consumer pay a portion of the tax. Consumers now pay P2 which is greater than the
original price of P1. The producer only retains P3 because the amount P2 minus P3 is the per
unit tax that must be paid to the government.
A tax placed on the consumer would have the same end result but instead of decreasing
the supply curve the demand curve would shift to the left by the amount of the per unit tax.
Consumers would pay price P3 and then pay the per unit tax of P2 minus P3 to the government.
The total price paid by consumers would be P2 and the amount received by producers would
be P3.
P
S2
(price
per
gallon)
S1
P2
P1
P3
D1
Q 2 Q1
Q
(gallo ns)
394 2
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Gas prices
Supply and demand analysis
Module-12
Answer
Lesson-I: Answer Key
9. Alaskan pipeline repair
Answer: Repairing corrosion and rust on the Alaska pipeline is estimated to cost as much as
$1 billion and may require temporarily shutting the valves on part of the nation’s largest oil field.
The short term result would be a decrease in supply, increasing price and reducing quantity
demanded.
P
S2
(price
per
gallon)
S1
P2
P1
D1
Q 2 Q1
Q
(gallo ns)
10. Exxon Valdez oil spill
Answer: In 1989 the Exxon Valdez tanker ran aground spilling more than 10 million gallons of
oil into Alaska’s Prince William Sound. In addition to the immediate reduction in supply available
for gas refining, Exxon has paid billions in retribution. Together these actions are shown by a
decrease, or leftward shift, of the supply curve. A decrease in supply will cause an increase in
price and a decrease in quantity demanded.
P
S2
(price
per
gallon)
S1
P2
P1
D1
Q 2 Q1
Q
(gallo ns)
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
2395
Gas prices
Supply and demand analysis
Module-12
Teacher
NOTES
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
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