Suppose that due to uncertainty in global markets, oil producers decided to decrease the supply of gasoline available at every possible price level.
a. On scratch paper, sketch a basic supply and demand graph for the gasoline market (no actual numbers are needed). Would you expect this change to cause the equilibrium price in the market to increase of decrease? Why? Would you expect this change to cause the equilibrium quantity in the market to increase of decrease? Why?
b. On the same graph you just drew and starting from your new equilibrium point, show how a decrease in the price of Sport Utility Vehicles (SUVs) would affect the equilibrium price and quantity of gasoline. Would you expect the supply or demand curve for gasoline to shift? Why? How does the new equilibrium compare to the both your initial equilibrium point and the new equilibrium point in part a.?
Suppose that the above-mentioned decrease in the supply of gasoline caused the average price of a gallon of gasoline in Maryland to rise from $2.40 to $2.90. This increase in gasoline prices caused the average gallons purchased per gas station to fall from 20,000 gallons per day to 18,000 gallons per day.
c. Write out the general equation for elasticity of demand and calculate the elasticity of demand for gasoline in Maryland based on the information above. Is demand elastic or inelastic in this case? Why?
d. Suppose that non-gasoline powered cars became less expensive and were of equal quality as gasoline powered cars. How would the demand for gasoline change? Would the elasticity of demand for gasoline also change? Why or why not?