Microeconomics? Please help?

Question

I need help with the following question. I am taking this course online and don't have a teacher that can help me.

Analyze why the prices of gasoline rose so high over the summer. Was it because OPEC cut back production and the number of people driving was more? Illustrate this using a graph showing a decrease in supply coupled with an increase in demand, resulting in large price increases.

If you can email me if you can help, it would be greatly appreciated. Thanks

Answer 1

Normally, the prices of gasoline and other "energy" commodities should be higher during winter than summer, but some summer seasons represent exceptions, and the previous summer was one. OPEC first stablized output and then cut it back, thus leading to reduced supply. In the meantime, demand was continuosuly on the rise due to several factors, including higher sales of automobiles, rising industrial output worldwide (and especially in China). These two factors (reduced supply and increased demand), backed by international and local worries about the ramifications of a possible new war in the Arab Gulf area launched by the US against Iran, led to a sharp rise in oil prices.

Diagrammatically speaking, the rising demand is represented by a leftward (downward) shift in the demand curve (which is negatively sloped, for sure, and is slightly steep in this case as gasoline's demand curve is relatively inelastic as it is a necessity). The cutback in output by OPEC is represented diagrammatically as a leftward (upward) shift in the supply curve (which is positively sloped, for sure, and is slightly steep due to the fact that the supply of oil is relatively inelastic as the reserves available from it worldwide are limited and getting lesser and lesser each day and are hard to discover and tap).

The result of these two shifts will be a sharp rise in price and and an uncertain change in quantity of equilibrium. Why??? Well, if the % rise in demand was higher than the % fall in output, quantity of equilibrium will be higher than the original quantity before any changes took place. If the % rise in demand was lower than the % fall in output, the new equilibrium quantity will be lower than the original one.

This type of inflation (price rise) is normally very tough because it was launched by two different reasons: a demand rise (demand-pull inflation) and a cost rise or supply cutback (supply-push inflation).

Well, I hope this helped you..

Answer 2

During the summer many many more people drive and the price of gas goes up.

Just make a supply and demand diagram and shift the demand to the right.