In the 1970s, the United States experienced periods of severe gasoline shortages due to OPEC policy and unrest in the Middle East. The price of gasoline increased as a result of these shortages. In response, the federal government imposed a price ceiling on gasoline.
1. Construct a demand and supply diagram. Use a demand curve that you think reflects the normal short-run price elasticity of demand for gasoline and a supply curve that you think reflects the normal short-run price elasticity of supply of gasoline. That is, if you think the demand for gasoline is relatively inelastic, draw a relatively steep demand curve; and if you think the supply of gasoline is relatively inelastic, draw a relatively steep supply curve. Indicate an original equilibrium price and equilibrium quantity.
2. Construct a demand and supply diagram. Indicate an original EP and EQ.
3. Assume the government sets a price ceiling below the Pe. Plot this price ceiling price on your diagram. What is the new market situation? How will it be decided who can buy the quantity supplied of gasoline?
4. How has the price ceiling affected consumer surplus? Why did it have this effect?