Market Demand For Gasoline Economics Essay

a) Analyze the market demand for the product or service and draw the demand curve. In the demand curve you are required to show different amounts of quantity demanded at different price with quantity in the horizontal axis and price on the vertical axis. Mention 3 factors that can affect the demand for this product or service.

The product that I choose is gasoline. Gasoline is elastic goods which means, the quantity demanded for gasoline are respond greatly when the prices is changes. Market demand means by adding together the quantities demanded by all individuals at each price. The graph above has shown the market demand for the gasoline.

MARKET DEMAND FOR GASOLINE

Price of gasoline

Lisa

Mira

Market demand

1

12

8

20

2

9

7

16

3

7

6

13

4

4

4

8

5

3

2

5

6

2

1

3

7

1

0

1

DEMAND CURVE FOR GASOLINE

From this graph, we can see the relationship between the price and quantity is negative. At price $4, the quantity demanded for gasoline is 8 units. When the price increasing to $5, the quantity demanded has decreasing to 5 units. And when the price has gone down to $3, the quantity demanded for gasoline has increasing to 13 units.

We have 3 factors that can affect the demand for gasoline. Firstly is the average income of consumers. When people income rises, consumers tend to purchase more automobile. So, the demand for gasoline also will be increases. Secondly is the size of market. When the number of population is high, people tend to use more gasoline for their transportation. Example like, in Malaysia, we have 2 million people. So people tend to use 25 times more gasoline than Singapore only has 1 million people. Lastly is price of related goods. Availability of related goods or complementary goods such as natural gas will affect the demand for gasoline also.

b) Analyze the market supply for the product or service and draw the demand curve. In the supply curve, you are required to show the quantity demanded at different prices. You are also required to name 3 factors of production for the good or service you choose.

Market supply is the sum of all individual supplies at each possible price. Gasoline is elastic good for supplier. The graph above has shown the market supply for the gasoline.

MARKET SUPPLY FOR GASOLINE

Price of gasoline

Diana

Catherine

Market supply

1

0

1

1

2

1

2

3

3

2

3

5

4

4

4

8

5

6

7

13

6

7

10

17

7

9

11

20

SUPPLY CURVE FOR GASOLINE

The 3 factor of production for gasoline is:

Land. It includes the soil, rivers,   lakes, ocean, mountain, forest, minerals and resource. 

Capital. Capital goods are classified into four. Firstly is fixed capital, secondly, circulating capital, thirdly is free capital, and lastly is specialized capital.

Labor is an exertion of physical, muscular strength, ability and mental efforts of individual.

What is equilibrium? Find the equilibrium price and quantity of the product or service and draw its graph. You need to explain what happens when there is a surplus for this product or service and show it in a separate graph.

Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded. At that equilibrium, there is no tendency for the price to rice or fall. Equilibrium price means the price that balances quantity supplied and quantity demanded. The equilibrium price is also called the market-clearing price. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium quantity means the quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

EQUILIBRIUM

Price of gasoline ($)

Quantity of demanded

Quantity of supplied

1

20

1

2

16

3

3

13

5

4

8

8

5

5

13

6

3

17

7

1

20

THE EQUILIBRIUM OF SUPPLY AND DEMAND FOR GASOLINE

GRAPH FOR SURPLUS

Surplus occurs when the price more than the equilibrium price and the quantity supplied more than the quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium. Refer to the graph above, we can see the surplus occurs when the price increase to $6. At $6, the quantity of supplier is 17 and the quantity demanded is 3. That’s means, at the price, the suppliers want to sell more than demanders want to buy. When price of gasoline at $4 and the quantity supplier is 8 units, we call it equilibrium because at this price, the quantity of demand and quantity of suppliers is equal. When surplus occurs, we will loss in revenue and price will gradually falls to reach a state of equilibrium as suppliers will lower their price.

d) Using the secondary data, show the changes of the demand and supply of these goods and service in the past and explain the result in word and then draw a graph.

The price of gasoline in year 1973 has decrease to 1.5 dollars per gallon, compare to the previous year; in 1967 the price is 1.8 dollars per gallon. Then, in year 1975, the price has goes up to 2 dollar per gallon. That time we call is the first oil shock occurs. And then, the second oil shock occurs in 1983 with the price increases to 2.8 dollars per gallon. In 1985, the price of gasoline has decrease to 1.4 dollars per gallon and then its decrease the price to 2 dollar gain in 1990 when the first gulf war occurs. Lastly, in 2004, when the war in Iraq occurs, they have not many changes to the price of gasoline. The graph above has show the fluctuated price of gasoline. Refers to the graph, we can see the demand of gasoline has decreases when the price has increase because gasoline is an elastic goods. People can use gas when the price of gasoline increases. The supplier also increases when the price of gasoline is increases.

GRAPH FOR GASOLINE

2) Distinguish the difference between “normal good” and “inferior good”? Give 3 examples for each.

Normal good is a quantity demanded for a particular good or service as a result of changes in the given level of income. A normal good is one that experiences an increase in demand as the real income of an individual or economy increase. To define a normal good is by calculating its income of demand. If this Coe-efficient is positive and lower than one, the good is considered to be a normal good.

An example of normal good is:

luxury cars

mobile phone

Television.

Inferior goods means a type of good for which demand decline as the level of income or real GDP in the economy increases. This occurs when a good has more costly substitutes that see an increase in demand as the society’s economy improves. An inferior good is the opposite of a normal good, which experience an increase in demand along with increases in the income level.

An example of an inferior good is:

public transportation

hamburger

Secondhand television.

In your opinion, is diamond a normal good or an inferior good? Justify your answer.

Diamond is a normal good because when the income raises, the demand for diamond also rises and vice versa. Diamond is such one of the luxuries good. Only some people who have a high income are afford to purchase it. Beside that, when the price of diamond is fall, the demand for the diamond will be increases. That’s means; people are willing to buy a diamond when the price is going down. That’s what we call a normal good.

c) Product x and y are substitutes and product y is an inferior product. What is the effect of an increase in the income on the demand of product y? How the change in the demand of product y affects the demand for product x? Draw the diagram for both product x and y and show the changes of demand curves in them.

Product x and y are substitutes and product y is an inferior product. When the income increases, the demand for product y will be decrease because when the consumer has a high income, the demand also increases. They prefer to choose a normal good compare to the inferior good. Let’s say, when the incomes are normal, consumers prefer to eat a hamburger, but when their income increases, they prefer to go to restaurant to eat a healthy food. That’s means, the demand for hamburgers are decreases when the income rises. When the demand of product y is decreases, the demand for product x will be increases because consumer are consume to buy a product x much more than product y.

It can show at the graph below:

Product x

Product y

3) The table below illustrates how the total utility that Ahmed derives from eating ice-cream changes as he consumes more and more ice cream each day.

Fill in the table above.

Ice-cream

Total utility

Marginal utility

0

0

0

1

12

12

2

22

10

3

28

6

4

32

4

5

34

2

b) Draw a diagram and explain the law of diminishing marginal utility for Ahmed.

Law of diminishing marginal utility for Ahmed

i) Total utility

ii) Marginal utility

The law of diminishing marginal utility means, as the amount of a good increases, the marginal utility of that good tends to diminish. When we consume more and more good, our total utility will grow at a slower and slower rate. Growth in total utility slows because our marginal utility diminishes as more of the good is consumed.

For Ahmed, at one consumption of ice-cream, the total utility is 12 and the marginal utility or their satisfaction is 12, but as he consume 2 or more ice-cream, the marginal utility has falls. By the law of diminishing marginal utility, the marginal utility falls with increasing levels of consumption.

4) Differentiate market economy, command economy, and mix economy.

Market economy is a system of allocating resource based only on the interaction of market forces, such as supply and demand. A true market economy is free of governmental influence, collusion and other external interference. We also call it a laissez faire style. The individuals and private sector firms make major decision about production and consumption. That’s a private ownership of resources. The price and market systems are used to coordinate and direct economy activity. Consumers would determine and influence the producers’ decisions to produce goods. In this form of economic organization, firms, motivated by the desire to maximize profit, buy inputs and produce and sells output. Household, armed with their factor incomes, go to markets and determines the demand for commodities. The interaction of firms supply and household demand then determines the prices and quantities of goods.

Command economy is an economy where supply and price are regulated by the government rather than market forces. Government planners decide which goods and services they want produced and how they are distributed. Sometimes we call it centrally planned economy. That is a public ownership of all recourse. Decision making is through central economic planning. Everything is controlled by the government.

Mixed economy is an economy system in which both the private enterprise and a degree of state monopoly coexist. All modern economics are mixed where means of production are shared between the private and public sector. We also called it a dual economy system. Mixed economy is a dominant form of economic organization in noncommunist countries. Mixed economies rely primarily on the price system for their economic organization but use a variety of government interventions such as taxes, spending and regulation to handle macroeconomic instability and market failures.

b) Do you agree with the contention that mixed economy is the best of all the three system?

Yes, I agree that mixed economy is the best of all the three system because in a mixed type economy, both, the private ownership as well as the state takes part in the means of production, distribution and other type of economic activities. The mixed economy allows private participation in the field of production in an environment of competition with an objective of attaining profit. On the contrary following to the socialism features it includes public ownership in production for maximizing social welfare. Simply in such type of economy there is the presence of private economic freedom with centralized planning with a common goal of avoiding the problems associated with both capitalism as well as socialism. In this system, the freedom in the economic activities are influenced by the government regulation and licensing policies.