The Theory of Demand and Supply

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The Theory of Demand and Supply

Demand and Supply代写 Part 1:The emission of carbon and other greenhouse gases have negatively impacted the global environment.

 

Part 1

The Law of Demand and Supply When Gasoline Prices Increase

The emission of carbon and other greenhouse gases have negatively impacted the global environment. The federal government has realized the effect of these emissions and has come up with carbon taxes to increase prices of such products as gasoline to encourage people and businesses to buy and produce less of them (“Congressional Budget Office,” 2016). The burden of high prices of gasoline weighs down on the energy-intensive industries and low-income households. However, to understand the logic behind a carbon tax, the law of demand and supply in the gasoline market is analyzed.

Numerous studies have been conducted to examine how gasoline price impacts on consumers and suppliers (Cohen, Lobel, & Perakis, 2015; Gillingham, Rapson, & Wagner, 2016; Li, Linn, & Muehlegger, 2014). The law of demand states that, when all factors are held constant, the demand for gasoline will decrease as the prices increase and vice versa. Similarly, the law of supply states that the quantity of gasoline supplied is directly related to price. The tables below illustrate the law of demand and supply in gasoline, respectively.

Demand Schedule for Gasoline  Demand and Supply代写

Price of gasoline ($/gallon) Quantity of Gasoline Purchased each weak per driver (gallons)
8 5
6 8
3 12
4 15
2 19
1 25

Demand Curve

1
1

Supply Schedule

Price of gasoline ($/gallon) Quantity of Gasoline Purchased each weak per driver (gallons)
8 23
6 21
4 17
3 15
2 12
1 8

Supply Curve

Demand and Supply代写
Demand and Supply代写

The demand schedule shows the quantity drivers are willing and able to purchase at different prices. It is clear that the lower the price of gasoline, the more gasoline they would buy. Other factors of production inclusive, the price of gasoline was increased by $0.25 per gallon as a carbon tax. As such, at $8 per gallon, the quantity demand is low, and as the price lowers from $8 to $1, the quantity demanded increases significantly.

On the other hand, suppliers are ready to supply more at $8 per gallon than at $1 per gallon. Therefore, the interaction of demand and supply forces in the gasoline market, establish the market equilibrium where the quantity demanded is equal to the quantity supplied. About the above schedules, the demand and supply curves for gasoline meet at an equilibrium price and quantity of $3 per gallon and 15 gallons, respectively. Any change in the factors that affect either the demand or supply will result in changes in the equilibrium price and quantity.

Market Equilibrium  Demand and Supply代写

The surplus in the market occurs when the quantity supplied exceeds the demand at a given price. The figure below shows the equilibrium price and quantity. The surplus five gallons occur for $4 per gallon. To sell the excess quantity, suppliers will need to reduce prices. On the other hand, demand deficit occurs when the quantity demanded to exceed that supplied. From the curve below, the shortage occurs for $2 per gallon. To increase supply, the market price for gasoline has to increase.

Surplus in the Market

2
2

Shortage in the Market

Demand and Supply代写
Demand and Supply代写

However, the demand elasticity of gasoline is relatively inelastic (Moffat, 2018). That is, the changes in the price of gasoline do not have a commensurate change in consumer demand for gasoline. The change in demand can be significant in short-run but remain constant in long-run as consumers adapt to new prices. Reason being, gasoline is a good of necessity in the United States and lack many substitutes.

However, gasoline consumption is affected by the development of hybrid cars, which will act as close substitutes. The graphs below show changes in gasoline price over some years and the changes in miles traveled (“Today on Energy,” 2014). The graphs show that the price has little impact on the consumption of gasoline. It means that for there to be a significant change, prices must be altered with a margin of more than 50 percent.

3
3

Source: U.S. Energy Information Administration, based on Federal Reserve Bank of St. Louis
Note: VMT is vehicle miles traveled. Per capita figures reflect U.S. population age 16 and over. Vehicle miles traveled figures are 12-month rolling averages.

Part 2

Impact of Household Income on the Demand, Supply, and Equilibrium  Demand and Supply代写

The theory of demand and supply is also affected by other factors other than prices. When these factors, such as household income are considered, they do not have a similar effect as changes in price. Increase or decrease in income shift the demand curve to the right or left, respectively. Reason being, propensity to spend of the household is directly related to disposable income. The curves below show shifts of demand curves to the right and left as the income increases and decrease for $3 per gallon and 12 gallons of gasoline respectively.

Shifts in Demand Curve due to Increase and Decrease in Income

Increase in Income

4
4

Decrease in Income

Demand and Supply代写
Demand and Supply代写

The shift in demand curve alters the market equilibrium price and quantity. At market equilibrium, the quantity demand equals the amount supplied. The curves below show the shift in demand curves right and left from market equilibrium. Therefore, when the demand increase due to shift of demand curve to the right, there will be excess demand of 2 gallons per driver.

To attract more suppliers, price increases from $3 to $4. Hence, the new equilibrium price and quantity are established for $4 per gallon and 17 gallons of gasoline. On the other hand, when the demand curve shifts to the left, the equilibrium price and quantity changes. Low demand results in excess supply and hence for suppliers to sell extra quantities, they have to reduce prices to attract more consumers. Therefore, lower market equilibrium will be established where consumers will buy at lower prices.

Income Impact on Equilibrium

5
5

Part 3

Combined Impacts of High Price and Low Income  Demand and Supply代写

When the price of gasoline increases and income decreases, the overall effect is the reduction in buying the power of consumers. The demand will reduce as a result of high prices and demand curve shifts to the left. From the figure below shows that market equilibrium at E0 for $3 per gallon and a quantity of 15 gallons.

6
6

The increase in a government carbon tax will increase the price of the gasoline to say $4 per gallon and hence will cause demand to fall to 12 gallons. At the same time, low income will cause a shift in the demand curve to the left from D0D0 to D1D1. The market equilibrium will also shift along the supply curve to E1. The shift will result in a lower price of $2 per gallon without a change in quantity when the prices were high at $4 per gallon.

At E1 the quantity supplied will be less and due to reduced consumer spending and hence low demand. Suppliers have no choice but to lower prices to sell the same quantity they sold at $4 per gallon. The increase in prices and decrease in income reduce propensity and choice of the consumer to spend.

References  Demand and Supply代写

Congressional Budget Office. (2016). Impose a Tax on Emissions of Greenhouse Gases. In Options for Reducing the Deficit: 2017 to 2026. Washington, DC: Congressional Budget Office.

Cohen, M. C., Lobel, R., & Perakis, G. (2015). The impact of demand uncertainty on consumer subsidies for green technology adoption. Management Science, 62(5), 1235-1258.

Gillingham, K., Rapson, D., & Wagner, G. (2016). The rebound effect and energy efficiency policy. Review of Environmental Economics and Policy, 10(1), 68-88.

Li, S., Linn, J., & Muehlegger, E. (2014). Gasoline taxes and consumer behavior. American Economic Journal: Economic Policy, 6(4), 302-42.

Moffat, M. (2018). The price elasticity of demand for gasoline. Retrieved from https://www.thoughtco.com/price-elasticity-of-demand-for-gasoline-1147841

Today in Energy. (2014). Gasoline prices tend to have little effect on the demand for car travel. Retrieved from https://www.eia.gov/todayinenergy/detail.php?id=19191

Demand and Supply代写
Demand and Supply代写

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