Principles of Economics- Mankiw (5th) 116

Principles of Economics- Mankiw (5th) 116 - 120 PA R T T W...

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120 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK CASE STUDY LINES AT THE GAS PUMP As we discussed in the preceding chapter, in 1973 the Organization of Petroleum Exporting Countries (OPEC) raised the price of crude oil in world oil markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. Long lines at gas stations became commonplace, and motorists often had to wait for hours to buy only a few gallons of gas. What was responsible for the long gas lines? Most people blame OPEC. Surely, if OPEC had not raised the price of crude oil, the shortage of gasoline would not have occurred. Yet economists blame government regulations that limited the price oil companies could charge for gasoline. Figure 6-2 shows what happened. As shown in panel (a), before OPEC raised the price of crude oil, the equilibrium price of gasoline P 1 was below the price ceiling. The price regulation, therefore, had no effect. When the price of crude oil rose, however, the situation changed. The increase in the price of crude
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