blanchard_ch03

72 the switch to summer grade fuel and a seasonal

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Unformatted text preview: 6/22/09 8:56 AM Page 73 Economic Analysis ■ ■ ■ ■ In April 2007, the average price of gasoline was $2.75 a gallon and 9.3 million barrels of gasoline were consumed on average each day. Figure 1 shows the market for gasoline in April 2007. The demand curve is D, the supply curve is S2007, and the market equilibrium is at 9.3 million barrels a day and $2.75 a gallon. Price (dollars per gallon) 9160335_CH03_p053-080.qxd Between April 2007 and April 2008, the price of crude oil increased from $65 a barrel to $118 a barrel. Equilibrium quantity ■ The rise in the price of crude oil raised the cost of producing gasoline and decreased the supply of gasoline. ■ Figure 2 shows what had happened in the market for gasoline by April 2008. ■ Demand remained unchanged, but supply decreased from S2007 to S2008. ■ Because demand was unchanged and supply decreased, the price increased and the quantity decreased. ■ ■ The equilibrium price increased from $2.75 a gallon to $3.51 a gallon and the equilibrium quantity decreased from 9.3 million barrels a day to 9.2 million barrels a day. You can see the effects of drivers conserving gasoline, switching to hybrid vehicles, and finding alternative means of transportation that include the bus, a bicycle, or even a skateboard. ■ This analysis of the market for gasoline emphasizes the distinction between a change in demand and a change in the quantity demanded and a change in supply and a change in the quantity supplied. ■ 9.1 9.2 9.3 9.4 Quantity (millions of barrels per day) Figure 1 The gasoline market in 2007 4.50 A rise in the price of crude oil decreases the supply of gasoline S2008 S2007 4.00 3.51 3.00 The price of gasoline rises 2.75 2.50 0 The quantity of gasoline decreases 9.0 The quantity of gasoline demanded decreases D 9.1 9.2 9.3 9.4 Quantity (millions of barrels per day) Figure 2 The gasoline market in 2008 Supply decreases—the supply curve shifts leftward. ■ 9.0 D In this example, there is a change in supply, no cha...
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