Using the market model to predict equilibrium price and quantity
Based on the NYT article offered below about natural gas fueled long-haul trucking, use the market model (the supply and demand model) to predict what would happen to the equilibrium price and quantity of natural gas, crude oil, and gasoline. (Please note: these three markets are relate either in production or in consumption. For example, crude oil is an important resource that is used in the production of gasoline, and natural gas is a substitute for gasoline in certain vehicles that could be converted from gasoline use.) Use the ceteris paribus assumption to hold all other phenomenon constant, i.e. no changes in consumer’s income, the prices of other energy does not change, no additional changes in technology, etc. The reason for this assumption is to isolate only those items we wish to study in this exercise. Begin your analysis with the supply and demand curves representing the market now and manipulate these curves to determine what will happen to equilibrium price and quantity in the three markets previously identified. It is not necessary to determine the exact price of 1)natural gas, 2)crude oil, and 3)gasoline, but rather indicate if the price will increase, decrease, or is indeterminate (cannot be determined).
Besides providing a verbal description of your analysis, you will also provide a diagrammatic model to support your analysis. This assignment should be completed in Word and you may want use the “Insert” tab in Word to select straight and curved lines from Smart Shapes with which to build your models. (Other word processing software will also have drawing functions.) Chapter three in your text provides examples of the market model as well as the videos that accompany this chapter. Please note the following: To complete this part of the assignment, you will have to supply three diagrams, one for each market: natural gas, crude oil and gasoline.
2. After completing the above analysis, incorporate the additional fact that incomes have been increasing in the U.S. What impact would this have on the equilibrium price and quantity of natural gas when combined with the information in the WSJ article? Please submit your answer in Word and provide a diagrammatic model with your explanation. I would recommend creating a Word file, because it will be easier to create your diagram in this application although other platforms also have the ability to draw the necessary line to create a supply and demand model..
Your document should be attached to Assignment 2.
Intro. to Macroeconomics