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Unformatted text preview: diagram, supply decreases from S to S.' Price then increases from p to p' and quantity falls from q to q.' Since the demand for gasoline is inelastic, total revenue in the gasoline industry will increase as price rises proportionately more than quantity falls. (NOTE: If you don't know the elasticity of demand, or if you are shifting demand and not supply, you wouldn't include that part about total revenue.) Because the price of gasoline has increased, the market for large cars, a complement in consumption, will be affected. Figure one shows a decrease in demand for large cars brought about by higher gasoline prices. When demand decreases from D to D,' price falls from p to p' and quantity falls from q to q.' Figure 1: Supply Decrease for Gasoline because of Hurricanes P D S' S p' p Q q' q Figure 2: Demand Decrease for Large Cars because of Increased Gasoline Price D D' S P p p' Q q' q...
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This note was uploaded on 11/15/2011 for the course AGEC 7100 taught by Professor Duffy,p during the Fall '08 term at Auburn University.
- Fall '08