The Supply Curve of Gasoline - Essay Example

This will raise the price of gasoline and as and result its quantity demanded will also be decreased (as quantity demanded decreases when price increases owing to the law of demand). In this way, the equilibrium quantity of gasoline be will reduced to the new level the Q’, and the equilibrium price will be raised to P’.
                      Quantite The impact of the increase in equilibrium prices of gasoline can be traced to the consumers of gasoline i.e., automobile owners. As far as the Luxury cars are concerned, which are not so fuel-efficient, the owners of Luxury cars will face an increase in the operational cost of their automobiles. Thus, the increase in the price of gasoline will decrease the quantity demanded gasoline and so will also decrease the demand for Luxury cars – the perfect complement for gasoline. Graphically, in the Luxury car market, the demand curve of Luxury cars will shift leftward and now there is a lesser dem for Luxury cars at each unit of their prices. Given the supply of Luxury cars, the leftward shift in their demand will decrease the equilibrium quantity of Luxury cars since the decrease in their demand will lead to excess supply of Luxury cars which will put downward pressure on their price and as a result, their quantity supplied will also be decreased (as quantity supplied decreases when price decreases owing to the law of supply). In this way, the equilibrium quantity of Luxury cars will be reduced to the new level Q’ and the equilibrium price will be decreased to P’.

The same impact can also be traced to the market of Economy cars which are fuel-efficient. Since the increase in the price of gasoline will decrease the demand for Luxury cars, the consumers will tend to switch to the less-expensive alternative – Economy cars. Since Economy cars are the substitutes of Luxury cars, a decrease in demand for Luxury cars will increase the demand for Economy cars. Graphically, in the Economy car market, the demand curve of Economy cars will shift rightward and now there is more demand for Economy cars at each unit of their prices. Given the supply of Economy cars, the rightward shift in their demand will increase the equilibrium quantity of Economy cars since the increase in their demand will lead to a situation of ‘excess demand’ of Economy cars which will put upward pressure on their price and as a result, their quantity supplied will also be increased (as quantity supplied increases with price). In this way, the equilibrium quantity of Economy cars will be increased to the new level Q’ and the equilibriumprice will also be increased to P’.

At the binding price ceiling – which is the maximum price set below the equilibrium price – suppliers can't charge what they had been. Consequently, some suppliers exit the industry, and thus supply is decreased. In this way, the market will be inefficient as it will prevent some sellers from selling their goods to buyers who value the goods higher than their cost ("Price ceiling" Wikipedia.org). On the other hand, consumers can now buy the product for less, so the quantity demanded increases. This will cause a shortage since the quantity demanded exceeds the quantity supplied.

            Since producer surplus is the area above the supply curve and below the market price, this area after imposing a binding price ceiling will be reduced from P*bc to Pec because the price is to be lower than what the supplier is willing to charge and the quantity supplied is also decreased. Similarly, since consumer surplus is the area below the demand curve and above the market price, the area after imposing a binding price ceiling will be increased from ABP* to model because the price is lower than what the buyer is willing to pay even though he will have to buy the lesser quantity than the equilibrium one due to shortage.

However, total surplus (sum of consumer and producer surplus) will be reduced because use decrease in producer surplus will more than offset the increase in consumer surplus. This is because even the consumer's summer will tend to buy more at the price lower than the equilibrium price, they can’t buy more due to shortage and thus will have to buy lesser than the equilibrium quantity.

Also, at the lower-than-equilibrium quantity, the marginal buyer's valuation is higher than the marginal seller's cost. It would be more efficient to increase the quantity produced up to the point where marginal buyer's valuation equals marginal seller's cost (Jerison, Introduction to Microeconomics). And, unless the two get equal at the margin (i.e., the unless market reaches its equilibrium), total surplus will be less than at its maximum, and be there will a deadweight loss, which is the loss in total surplus, represented be the area ‘bed’ in the above figure. That’s how total surplus is reduced due to the imposition of a binding price ceiling thus creating an inefficiency or deadweight loss.