Supply and Demand Reveals the

¶ … Supply and Demand" reveals the underlying factors driving up the price of gasoline in America. First, the world-wide demand for gasoline is up as developing counties such as China and India with a combined population of eight times the United States are using more energy. Americans have lost their will to curb their appetite for gasoline, driving fuel inefficient SUVs instead of conserving gas. Even though demand is going up, supply is going down.

Since 1996, crude oil production in the United States has dropped 12.3% and hurricanes Katrina and Rita imposed another loss of five percent of national refining capacity. Internationally, there have been supply disruptions in Nigeria and decreased production in Iraq. The author also claims that gasoline blend requirements for specific cities to address air quality concerns introduce gasoline supply rigidities. Further, industry regulations such as those requiring increases in blended ethanol use cause gasoline shortages.

According to the author, this situation is made worse because of the high American tariffs on importing Ethanol to protect Midwestern farmers. In normal situations, an increase in demand raises prices, which, in turn, should encourage more supply. This additional supply should then bring the price to its equilibrium level (the price at which demand and supply are exactly equal) in the long run. However, if supply cannot respond to a higher price, a larger demand simply increases the price paid by consumers.

According to the article, the price of gas has been going up for ten years, indicating a short-run and long-run aggregate supply problem. The following diagram shows an increase in aggregate demand that exceeds an increase in short run aggregate supply and long run aggregate supply, increasing the price level. On the demand side, the demand for gasoline appears to be price inelastic as indicated that demand is still increasing even though prices are rising.

The price elasticity of demand measures the rate of response of quantity demanded due to a price change. The formula (%?Q d)/(%?P) is used to calculate the price elasticity of demand. Quantity demanded is price insensitive (inelastic) when %?Qd < %?P, indicating that a price change causes less of a corresponding change in quantity demanded. This price is inelastic because, in the short-term, consumers have not found an effective way to conserve energy' consumers need gasoline and there are few substitutes. A tariff is a tax on foreign goods.

In the ethanol example, the American.