Economics

Line at Gas
Pumps &
GDP
Fluctuation
s in the US
Table of Contents
Introduction

Page 1

Task

First Case Study

Page 2 11

A) Page 24
B) Page 5
C) Page 6
D) Page 78
E) Page 9 10
F) Page 11

Second Case Study

.
Page 12 -18

A) Page 12
B) Page 13
C) Page 14
D) Page 15
E) Page15
F) Page16
G) Page 16
H) Page 17
I) Page 17
J) Page 18

Conclusion
. Page 19

Bibliography

. Page 20
Introduction (First Case Study)
In the first case study I will discuss about the Organization of Petroleum
Exporting Countries also known as (OPEC) raised the price of Crude oil in
world oil markets. Because Crude oil has a big contribution on making
gasoline the higher its price the bigger reduced of production for gasoline.
There has been long line at Gas stations became common place & drivers
often had to wait for hours to buy only few gallons of gas. What was the
starting point of these long gas lines? Most of the people affected blames
OPEC. Surely if OPEC did not rise the price of crude oil , the shortage would
not even exist. Yet economist blames US government the regulations that
limit the price of oil companies could charge for gasoline.

Introduction (Second Case Study)

The economy in the US fluctuates every year. Moreover most of the years the
production of goods & services rises. Because it increases in labor force,
increases in the capital stock & some advances. The economy can produce
more overtime. This increase allows everyone to enjoy higher standard of
living. On the past 50 years on average. The economic production of US is
measured by GDP & it has growth by about 3 percent yearly. In some of
those years, however, this normal growth does not happen. Firms find
themselves unable to sell all of the goods & services. Most of the workers are
down unemployment has grown & some of the factories are closed. With the
economy producing fewer goods & services real GDP & other measures of
income fall so to analyze the short run fluctuations most economist use the
model of aggregate demand & supply.
 First Case Study

Supply & demand of Gasoline

In the illustration shown above is the supply & demand curve for
gasoline. The point where quantity supply (QS) & quantity demand
(QD) has meet in a single point in the price & quantity is called an
equilibrium point. In which it shows that the quantity supply & the
quantity demanded for gasoline is also equal. This means that the
price for crude oil has not been risen yet.
Shift in Supply of Gasoline

The illustration above shows the effect in increasing price of crude oil &
the decrease of supply in gasoline. To prove it the equilibrium point has
shift to the left which means decreasing also the price of the crude oil
increasing thats why PE has moved up the new PE which is PE2 in
these case. Moreover the QE has also shift to the left & became P2
which means they have decrease in quantity & cant supply the
demand like the illustration in the figure one which has equal PE & QE.
The reason for these decrease is because Crude oil A RAW material for
making gasoline
Non price Changes are the factors that may affect change in supply of
gasoline. I will show in the illustration bellow.

If the production cost of gasoline increase the supplier will face increase in
cost for each quantity level. Holding all the supply curve will shift inward to
the left. Showing the increase in cost of production. The supplier will be able
only to supply less at each quantity level. Moreover if the production cost has
been declined the opposite would be true. Lower cost would cost in a
increase output of supply curve outward to the right & therefore the supplier
will be able & willing to sell a larger quantity at each price level. The supply
cure will then shift in relation to technological improvements & expectations
in or of the market behavior in almost the same way described for the
production cost technological improvements that results in a increase in
production for a set amount of inputs would result in a outward shift of
supply. Now supply will shift outward in response to the higher consumer
demand or preference the curve will respond by shifting inward if there is an
assessment of a negative impact to production cost or demand. Below is an
illustration of a curve which has non price changes in supply for gasoline.
Movements that can change the demand curve for gasoline are due to a
change in price of the gasoline or other constant variables such as price
substitute if the price of gasoline changes. The consumer will adjust its
demand based on the preferences income & price of these factors.

Shifts in the gasolines demand curve can change by non-prices events that
will include income or preferences.

Changes in preferences could be one of the factors that can change the
demand curve of gasoline or a decrease in quantity level desired for a
specific price of the consumers. Also an increase in price would lead to a
severe factor that can change the demand curve for gasoline.
 Price Ceiling is a government imposed price control or limit on how
high a price is charged for a product. Government intended that price
ceilings to protect consumers from situations that could make
necessary commodities unattainable. However a price ceiling can
cause problems if imposed for a long period without controlled
rationing.

Non-binding price ceiling: This is a price ceiling that is greater than

the current market price

Binding price ceiling: This is a price ceiling that is less than the
current market price.
Binding Price ceiling creates an excess in demand (QD) when they are
under or below the market the market clearing price. If price ceiling is
below the equilibrium the quantity demand for example Gasoline
exceeds the quantity supplied for gasoline. Resulting in shortage or
scarcity. This will results in a loss of social surplus compared to the
situation of market clearing price. There will also be Long lines,
discrimination by sellers.
For instance the figure above shows that there is a short fall from
equilibrium price because QD > QS therefore leading to shortage.
A free market is market that the government has no power or authority over
it. Meaning the produces or sellers are the price manipulators. Price ceilings
& Price floors does not affect anyone in these kind of markets. There are less
restrictions than the government regulated market.

In the graph below the sellers of free market is selling the gasoline in point
P1 but P1 is below the point E which is Equilibrium price. & if there selling at
the price below the equilibrium price there would then be a shortage. & if the
quantity supplied is less than the quantity demanded. Means that consumers
are demanding more gasoline than the sellers can supply them. In order to
resolve the shortage the sellers r producers need to make the price of
gasoline higher.

Shortage of gasoline
In this case the producers are selling higher or above the equilibrium price
since the price has moved above on the equilibrium price this will result in a
surplus meaning the producers has sold to a higher price resulting in lower
demand & higher supply or QD<QS. Because of these the gasoline price &
supply is higher & the consumers does not reach the QS to match with the
QD to resolve this problem of exes supply the sellers need to lower the price
of gasoline so that the buyers can afford more gasoline resulting in QD = QS.
& thus resolving the surplus in the graph.

Surplus of Gasoline
 If the Government put taxes on gasoline it would affect both producer &
consumer. Taxes also change the equilibrium of the market & will always
make the consumers which in these case the gasoline buyers will page more
because of the taxes while the producers in these case the sellers will also
receive less. In the graph below it is shown that the supply curve or (S) is
elastic while the demand curve or (D) is inelastic. Due to the following
circumstances the consumers or the buyers will suffer more from tax than
the producers or sellers. Why is the demand not affected? Because gasoline
is a modern day necessity therefore no matter how high the price & how high
or low the supply the demand will not change.
1) The Quantity demanded of Gasoline
In these illustration the demand curve for gasoline is inelastic therefore
it is not affected or very sensitive in change in price. So if the price of
gasoline gone up lets say $100 to $110 or 10% it will not affect the
demand for gasoline.

2) The revenues of gasoline suppliers

In the first illustration bellow you will see that the selling price for
gasoline by the producers or sellers is represented by P1 or Price #1
while the Q1 represents Quantity #1 I shaded the part which the seller
revenues when they sell a gasoline . & in the second illustration is the
 increase in price (P) by 10% therefore P1 will shift to P2 while Q1 will
now then shift to Q2 meaning the revenues will increase since the
relationship has a positive effect with price.

Second Case Study

The Diagram Above Shows the aggregate demand (AD) curve short run
aggregate supply (SRAS) & long run aggregate supply (LRAS).
Y = C + I + G + NX lets assume that G is fixed by Government policy. To
understand the slope of AD and also we must determine how a change in P
affects C,I, & NX.

There is the wealth effect (P & C)

Suppose P rises the money that people hold can buy fewer G & S so the real
wealth is lower & if people feel poorer C falls

There is also the Interest Rate Effect (P & I)

Suppose P rises by buying G & S requires more money to get the money
needed people will sell bonds or other assets. & this will drive up interest
rates resulting I will also fall
Any event that changes Wealth effect , Interest Rate , or Exchange rate
effect other than a change in P will shift the AD curve

Change in wealth effect Change in

G

-Stock market boom - Federal

Spending

-Preferences / Consumption / Saving Tradeoff -State & Local

Spending

Change in Interest rate Changes

in NX

-Firms buy new goods - Booms Recessions in

countries that buys the export

-Expectations, optimism - Appreciation

-Interest rates, monetary policy

-Investment tax credit or other tax incentives

Why is LRAS curve is vertical? Because Y determined by the economys
stocks , labor , capitals & moreover natural resources . & also on the level of
technology an increase in price does not affect any of those so I will not
affect Y.

Any event that changes any of the factors in Yn will shift LRAS .

-Changes in natural rate of unemployment

-Immigration
-Government policies reduce natural U- Rate

Policymakers can use monetary and fiscal policy to influence aggregate

demand. However the are other factors that can affect aggregate demand as
well. So stabilizing the economy is inexact science. shows the total quantity .
of goods & services demanded in the economy for any price level. Here are
the reasons. When policy makers seek to disturb or influence the economy
they have to things at their disposal monetary & fiscal policy. banks indirectly
target activity by influencing the money supply through adjustments in the
interest rates , bank reserve requirements & the purchase & sale of
government security exchange. Three effects work together to explain the
downward slope of the aggregate demand curve. Of those three, Keynes'
interest rate effect is the most important. wealth effect is the least important
since households hold so little . of their wealth in money holdings. Since
exports and imports are such a small portion of the U.S. GDP, the Fleming
exchange rate effect is not very important either.

The aggregate demand curve shows the total quantity of goods & services
demanded in the economy for a range of price levels .

The wealth effect a lower price level will rise the real value of
households money holdings & higher wealth stimulates consumer
spending or buying
The interest rate effect - A lower price level lowers the interest rate
& people try to lend out their excess money holdings & the lower
interest rate simulates investment spending.
The exchange rate effect when a lower price level lowers the
interest the investors will move some of their founds overseas or
abroad thus will cause the domestic currency to depreciate relative
 to foreign currencies. These depreciation makes domestic goods
cheaper compared to foreign goods & then simulates spending for
the next exports.

AD will shift to the left because if there is not enough quantity there will be
less production or price therefore if the government will reduce spending to
the project by 10 billion the project may would have high maintenance cost
high rate of cracks of defects because they have reduced some quality
because of the reduce in $10 billion.

Phillips Curve
The Phillips curve shows the trade-off between inflation and unemployment, but
exactly how accurate so is this relationship within the long run? According to
economists, there is certainly no trade-off between inflation and unemployment
over time. Decreases in unemployment can result in increases in inflation, but only
in the short run. In the long run, inflation and unemployment are unrelated.
Graphically, this means the Phillips curve is vertical in the natural rate of
unemployment, or perhaps the hypothetical unemployment rate if aggregate
production is within the long-run level. Tries to change unemployment rates only are
designed to move the economy up and down this vertical line
This example highlights the way the theory of adaptive expectations predicts
that we now have no long-run trade - offs between unemployment and
inflation. In the short run, it is possible to reduce unemployment in the cost.
of higher inflation, but, eventually, worker expectations will get caught up, in
addition to economy will correct itself with the natural rate of unemployment
with higher inflation.
.

As a good example of how this pertains to the Phillips curve, consider again.
Assume the economy starts at point A, with an initial inflation rate of 2%
while the natural rate of unemployment. However, under rational
expectations theory, workers are intelligent and fully conscious of past and
present economic variables and change their expectations accordingly. They
will have the ability to. anticipate increases in aggregate demand in addition
to accompanying increases in inflation. As a result, they will raise their
nominal wage demands to match the fore casted inflation, and they will not
have an adjustment period when their real wages are less than their nominal
wages. Graphically, they will move seamlessly from point A to point C,
without transitioning to point B.

Conclusion
We discuss in these report about the market prices changes in quantity demand &
supply that a change in quantity demanded will have a huge effect for quantity
supplied while having quantity supplied change the difference will not be that huge
if you compare .we also discussed about the Governments Price floor & price ceiling
that the government has some issues with the prices in our market that they control
the highest price or the lowest price for a certain product which brings us with
addition to binding & not binding now to revise this we need to discuss it we already
know that a binding price will result in oversupply of a product. Then the taxes I did
not know until now that we have been paying higher taxes than the sellers that the
bigger share in the taxes percentage is coming from the buyers not the sellers but
also the sellers lose more demand because of high tax rates of a country. & lets also
tackle the surplus & shortage now we already know if we say shortage it is scarcity
of something a product or workforce by men or women but in these case the
scarcity of gasoline in todays modern industry which everything is mechanical we
all need gasoline. Which is a modern day need these was shown in a graph that we
discuss that if there is a drop in price below the equilibrium in the free market how
are they going to return it to a stable & fix equilibrium. Now we can tackle about the
policy makers or the price manipulators they have two tools they can use . which is
monetary & fiscal which is both important for price changing because it will help the
policymakers do their job & had a stable reputation without getting the people to
get mad at the policy makers. We have also discuss about aggregate demand
aggregate supply the long rung aggregate demand & supply & also the aggregate
demand & supply for short run. We also tackle how & why are the LRAD or SRAD
are shifting also the AD that because to people feeling poorer or people who
prioritize will be the base idea for these changes in price & demands quantity
moreover quality i learned that economics is hard & you need to study it harder if
you want to understand its main points or key points.

Reference & Bibliography

Elliot K.. (2008). change in supply. Available:
https://www.boundless.com/subjects/. Last accessed 28th April 2014.

Klein C. (2013). expectations & inflations. Available:

https://www.boundless.com/economics/inflation-and-unemployment/the-
relationship-between-inflation-and-unemployment/relationship-between-
expectations-and-inflation/. Last accessed 30th April 2014.

Economics Lecture 4 21

Some of the Drawings are also from

Economics Lecture 4 - 21

Some Drawings are made from:

Martin Owens. (2013). Draw Freely. Available: http://www.inkscape.org/en/.

Last accessed 29th April 2014.de from