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    Consider the following event: Due to severe damage, a gas pipeline supplying gas to Arizona was shut down for a few weeks in the summer of 2003. Gas became scarce in Arizona, and prices rose, causing consumers to panic.

    Predict how the following event affected the market equilibrium.

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    Solution Preview

    Since gas is considered a necessity especially when most cars in the United States now are not fuel efficient - most people are seen driving SUV's and trucks which consume huge amounts of gas. Being a necessity, the demand for gas is inelastic as there are very few substitutes. It is true that there are hybrid cars, but these are very expensive to buy; also not all consumers would have the financial ability to purchase new cars to make up for the increase in the price of gas. The supply of gas, in this situation would also be inelastic since "Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price." This contradicts the law of supply which states that
    "Higher prices raise the quantity supplied."
    The reason behind this conflict is that under normal circumstances, suppliers have control as to what quantities to supply and at which prices, but under such circumstances when the reason for the decrease in supply is beyond the control of suppliers, supply becomes more and more elastic with quantity ...

    Solution Summary

    Factors affecting market equilibrium are assessed.