Question

Review Figure 3.4 again. Suppose the price of gasoline is \(1.00. Will the quantity demanded to be lower or higher than at the equilibrium price of \)1.40 per gallon? Will the quantity supplied be lower or higher? Is there a shortage or a surplus in the market? If so, of how much?

Short answer

The quantity demanded at a price of $1 per gallon of gasoline will be higher than at a price of 1.40 per gallon, which is the equilibrium price. This is because people demand more at a lesser price. At $1, the quantity supplied will be reduced since enterprises do not find it profitable to offer their items at a lower price than equilibrium.

Step-by-step solution

Given information

The equilibrium price of gasoline is $1.40. The current price is $1.

Explanation

At the equilbrium price of $1.40, the equilibrium quantity is 600 million of gallons. At a lower price, the quantity demanded would be higher, because of inverse relationship between price and quantity demanded.

At price level of $1, the quantity demanded would be 800 millions of gallons. But the quantity supplied at this price level would be lower at 500 millions of gallons.

This difference in quantity demanded and quantity supplied would create a shortage in the market.