Review Figure 3.4 again. Suppose the price of gasoline is ...

Review Figure 3.4 again. Suppose the price of gasoline is $\$ 1.00 .$ Will the quantity demanded 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?

Key Concepts

Market Disequilibrium (Shortage and Surplus)

When the market price deviates from the equilibrium price, it can result in either a shortage or a surplus. A shortage happens when the quantity demanded exceeds the quantity supplied, which is typically the case when the price is below equilibrium. Conversely, a surplus occurs when the quantity supplied exceeds the quantity demanded, which generally happens when the price is above equilibrium. These disparities prompt adjustments in the market towards equilibrium.

Market Equilibrium

Market equilibrium occurs when the quantity supplied equals the quantity demanded at a particular price level. The equilibrium price and quantity are established by the intersection of the supply and demand curves, and any deviation from this equilibrium leads to either a shortage or a surplus until price adjustments restore balance.

Law of Demand

This principle states that, all else equal, a lower price for a good or service leads to a higher quantity demanded, and conversely, a higher price results in a lower quantity demanded. It is fundamental to understanding consumer behavior in reaction to price changes, indicating that at a price of one dollar, consumers are likely to demand more gasoline compared to the equilibrium price.

Law of Supply

This concept indicates that, assuming all other factors remain constant, producers are willing to supply a higher quantity of a good when its price is higher and a lower quantity when its price is lower. Consequently, at a price of one dollar, suppliers are less inclined to offer as much gasoline as they would at the higher equilibrium price.

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