Question

Review Figure 3.4 again. Suppose the price of gasoline is $\backslash (1.00$. Will the quantity demanded be lower or higher than at the equilibrium price of $\backslash )1.40$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

When the price of gasoline is $\$1.00$the quantity demanded will be higher and the quantity supplied will be lower than at the equilibrium price of $\$1.40$per gallon.

There is a shortage in the market of$300$million gallons.

Step-by-step solution

Step 1. Quantity demanded and supplied.

Quantity demanded is the number of goods the consumer demands in a particular time period.

Quantity supplied is the number of good the producers supplied with respect to the demand of the commodity.

Step 2. The quantity demanded and quantity supplied at $1.00.

At price of $\$1.00$the quantity demanded of gasoline will be higher than at the price of $\$1.40$because the quantity demanded increases with decrease in price.

At price of$\$1.00$the quantity supplied of gasoline will be lower than at the price of$\$1.40$because the quantity supplied of a commodity decreases with decrease in price.

Step 3. The shortage or surplus in the market.

At the equilibrium price $\$1.40$, the equilibrium quantity is $600$million gallons. When the price of gasoline is $\$1.00$, the quantity demanded is $800$million gallons and the quantity supplied is $500$million gallons. Hence, there is a difference of $300$million gallons.

In the above diagram, the equilibrium point is $E$. A point below the equilibrium point shows a shortage of the commodity. At $\$1.00$price of gasoline the quantity demanded is greater than the quantity supplied, there is shortage in the market.