Supply and Demand Reveals the Term Paper

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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.

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A tariff is a tax on foreign goods. In the ethanol example, the American tariff is of benefit to the Midwestern farmers who now face reduced competition in their home market. However, consumers of gasoline are paying for this benefit because the reduced competition has caused prices to rise.

In summary, the rise in gasoline prices for American consumers discussed in the article "Say It With Me: Supply and Demand" is a perfect storm involving aggregate supply constraints and inelastic demand. And, the issue is only being made worse by government tariffs......

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