Energy Prices and the Laws of Suppy and Demand Summary: By using the aws of suppy and demand, students demonstrate how the marketpace sets energy prices and show how these prices change. Objectives Students wi be abe to define demand, suppy, and equiibrium price and quantity; read, interpret, and draw graphs depicting demand and suppy curves, and determine energy prices from these curves; and identify the conditions that cause a shortage or surpus of an energy resource. Rationae Investigating the reationship between the suppy, demand, and price of energy resources heps students understand how energy prices are set, how different conditions cause prices to change, and how changes in energy prices affect the househod budgets of Wisconsin citizens. Materias Graph paper Bank overhead transparencies (optiona) Markers (optiona) Copies of the foowing pages from the Student Book: Demand Curve for Gasoine, page 11 Suppy Curve for Gasoine, page 12 Copies of Suppy and Demand Activity Sheet, page 13-15 Copies of Ms. Sene s Diemma, page 16 (optiona) Background The corner service station posts a arge sign that reads $2.50 per gaon for reguar uneaded gasoine. A utiity bi ists a rate of 11.5 cents per kiowatt-hour for eectricity and 58 cents per therm for natura gas. An ad in a oca newspaper offers firewood for sae at a cost of $150 per cord. Energy prices, ike the prices of other goods and services, are pieces of information that te peope how much money they must pay for a certain amount of fue or other energy source. How are energy prices determined? Cues that hep answer this question often come in the form of environmenta and sociopoitica events associated with changes in energy prices. An unusuay cod winter drives up the cost of heating oi, natura gas, and propane. An economic embargo against a foreign oi-producing nation is ifted, and gasoine prices decrease some months ater. Events ike these indicate how market forces cause changes in energy prices. From such changes, economists have discovered two fundamenta reationships that describe how energy prices (and the prices of other goods and services) are set. These reationships are known as the aws of demand and suppy. The aw of demand states that, other things being equa or constant, decreasing the price of a good or service increases the quantity purchased of the good or service demanded by consumers. In other words, the price of a good or service is inversey reated to the quantity demanded. For instance, if gasoine prices decrease, the quantity of gasoine demanded increases, and vice versa. This reationship can be demonstrated by showing drivers a range of gasoine prices and then asking them how much gasoine they woud be wiing to buy each week at each price. Drivers woud ikey respond by saying that the ower the price of gasoine, the more gasoine they woud buy. This information can be summarized in a tabe caed a demand schedue (see exampe chart on the next page) or on a graph caed a demand curve (see Demand Curve for Gasoine). The aw of demand hods true not ony for drivers buying gasoine, but aso for consumers buying any kind of goods or services, incuding other energy sources. In some cases, the quantity of gasoine purchased by customers may not vary Grade Leve: 9 12 Subject Areas: Famiy Living and Consumer Education, Language Arts, Mathematics, Science (Environmenta), Socia Studies (Economics) Setting: Cassroom Time: Preparation: 30 minutes Activity: two 50-minute periods Vocabuary: Demand schedue, Equiibrium price, Equiibrium quantity, Law of demand, Law of suppy, Shortage, Suppy schedue, Surpus Major Concept Areas: Consumption of energy resources Quaity of ife Standards Addressed: Common Core ELA: RLST.9-12.3, RLST.9-12.4, RLST.9-12.5, WHST.9-12.4 Common Core Math: MP2, MP4, MP6; A.CED.2, A.REI.10, A.REI.11, F.BF.1, F.IF.1, F.IF.2, F.IF.4, F.IF.5, F.IF.6, F- IF.7, F.LE.1, F.LE.2, N-Q.1 NGSS: HS-ESS3-2 SEP: Engaging in Argument from Evidence DCI: ESS3.A: Natura Resources CCC: Infuence of Science, Engineering, and Technoogy on Society and the Natura Word Getting Ready: Obtain the current price of gasoine from a oca gasoine service station. 2015 KEEP 1 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide
Resources: For a ist of additiona resources reated to this activity, visit the KEEP website at keepprogram.org and cick on Curricuum & Resources Reated KEEP Activities: Severa activities in this guide address the economics of energy deveopment and consumption. Use Energy Divide to introduce concepts found in this activity. At Watt Rate heps students understand how much energy they use. Foow this activity with Reading Utiity Bis, Reading Utiity Meters, and the Energy Cost Anaysis Sheets in The Cost of Using Energy. Use Energy Futures to have students envision how future societies wi use energy resources. Demand Schedue for Gasoine Price of Gasoine ($/gaon) much with changes in gasoine prices. For instance, customers who must commute to schoo or work during the week may buy approximatey the same amounts of gasoine over a certain range of prices. In these cases, the customers demand for gasoine is said to be ineastic. However, the quantity of gasoine demanded by customers wi change if the range of gasoine prices is arge enough. Many customers who must commute wi drive ess or use aternative transportation if they cannot afford high gasoine prices. On the other hand, the demand for certain goods and services may vary greaty with changes in prices. In such cases, demand is said to be eastic. An item that may exhibit eastic demand is music compact discs (CDs), where the quantity of CDs consumers purchase tends to be sensitive to changes in CD prices. Quantity of Gasoine Purchased Each Week per Driver (gaons) $8.00 5 $6.00 8 $4.00 12 $3.00 15 $2.00 19 $1.00 25 The phrase other things being equa or constant is stated as part of the aw of demand so that variations ony in price and quantity are considered rather than prices of reated goods or services or consumer tastes over a short period of time. A these factors may compicate or obscure the reationship between the price and the quantity demanded. Yet these factors aso change demand. How? They shift the entire demand curve to the right or eft of its origina position. For exampe, a rise in the income of drivers wi usuay shift the demand curve for gasoine to the right. Drivers may then buy 30 gaons of gasoine per week instead of 25 gaons at $1.00 per gaon, 24 gaons instead of 19 at $2.00 per gaon, and so on. On the other hand, a decrease in drivers income wi usuay shift the demand curve to the eft, meaning that drivers woud buy ess Increase in Income Shifts Demand Curve to the Right Decrease in Income Shifts Demand Curve to the Left Price of Gasoine ($ per gaon) D Dnew Price of Gasoine ($ per gaon) Dnew D $3.00 $3.00 15 18 12 15 Quantity of Gasoine (gaons) Quantity of Gasoine (gaons) KEEP Energy Education Activity Guide theme III: effects of energy resource deveopment Energy Prices 2
Price of Gasoine ($/gaon) gasoine at each price than they did before. The demand for goods and services is not enough to set prices at a singe vaue; producers or suppiers of goods and services are aso invoved. Like in the aw of demand, in the aw of suppy a reationship exists between the price of a good or service and the quantity that suppiers are wiing to produce. This aw of suppy states that, other things being equa or constant, increasing the price of a good or service increases the quantity produced. In other words, the price of a good or service is directy reated to the quantity suppied. For exampe, a service station owner woud be wiing to se more gasoine at a higher price. This behavior can be summarized in a tabe caed a suppy schedue (above) or on a graph caed a suppy curve (see Suppy Curve for Gasoine) The aw of suppy is not as obvious as the aw of demand. For instance, arge manufacturers can produce products more cheapy at higher quantities than smaer manufacturers can. However, in this case other things are not equa or constant. Large manufacturers are abe to offer products at arge quantities and ower prices by investing in new and improved equipment, retraining their workforce, and improving production processes. The aw Suppy Schedue Quantity of Gasoine Purchased Each Week per Driver (gaons)) $8.00 23 $6.00 21 $4.00 17 $3.00 15 $2.00 12 $1.00 8 of suppy hods these factors constant over a short period of time. This means manufacturers must use their present equipment, empoyees, and production processes to suppy goods and services. Producing greater quantities whie keeping these factors constant increases the costs that manufacturers must bear and causes them to increase prices. Like changes in the factors affecting demand, changes in these and other factors, such as the cost of production or the number of manufacturers producing the same product, cause the entire suppy curve to shift to the right or eft of its origina position. Working together, the aws of demand and suppy show how prices are set when consumers and producers interact. An equiibrium price and quantity arises when, for a given price, the quantity demanded by consumers is equa to the quantity suppied by producers. This reationship can be seen by pacing the Demand Curve for Gasoine graph over the Suppy Curve for Gasoine graph. The demand and suppy curves for gasoine meet at an equiibrium price of $3.00 per gaon and an equiibrium quantity of 15 gaons each week per driver. Changes in the factors affecting demand and suppy resut in changes in the equiibrium price and quantity. See Exampes of Suppy and Demand Curve Shifts. A surpus arises when the suppy of a good or service exceeds its demand at a given price. In the gasoine exampe, a surpus of five gaons per driver occurs at a price of $4.00 per gaon. Larger surpuses occur at higher prices. Temporary surpuses may occur because of overproduction and may be aeviated by cutting prices, reducing the quantity of goods and services being produced, or reducing the number of suppiers. When demand exceeds suppy, a shortage of a good or service arises. In the gasoine exampe, a shortage of seven gaons per customer occurs at a price of $2.00 per gaon. Larger shortages occur at ower prices. Shortages may occur because of underproduction and may be aeviated by raising prices, increasing the quantity of goods and services being produced, or increasing the number of suppiers. When shortages persist, suppiers may be forced to imit the quantity of the product being sod by rationing it, or they may be forced to se their product on a first-come, first-served basis. The aws of suppy and demand provide a straightforward yet powerfu way to expain how energy prices are set and how they change. Think about them the next time you see the price of gasoine on a sign posted by the corner service station. Procedure Orientation Ask students if they know the current price of gasoine in doars per gaon. Then ask them how this price was determined. If any students drive, ask them to estimate how many gaons of gasoine they buy each week at the current price. List their responses on the chakboard. Steps 1. Recreate the tabe to the right on 3 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide
the chakboard. Incude the current price of gasoine in the tabe and the quantity of gasoine students generay buy at that price (from Orientation). Write 10 gaons if students do not know how much they buy. 2. In the tabe on the right, using current price and quantity of gasoine as reference points, ask students how much gasoine they woud purchase per week at each price. Pace this information in the quantity coumn. You may prefer to ask students who drive to provide quantity information, athough most students shoud be abe to provide estimates that decrease as the price increases. NOTE: Some students may say that they purchase about the same amount of gasoine per week for the range of prices shown on the tabe. If so, point out that their demand is ineastic. Then ask these students if they woud purchase the same amount of gasoine for prices higher than $8.00 per gaon. Note their responses. 3. Te students that the tabe you re using is caed a demand schedue and have them state the reationship between the price and the quantity of gasoine purchased per week. Have students pot a curve on graph paper or on overhead transparencies using the data from the demand schedue tabe. 4. Show students the overhead of the Demand Curve for Gasoine and have them compare this curve to the one they potted. Point out that these curves are caed demand curves. Have students become famiiar with the Demand Curve for Gasoine by having them read a few prices corresponding to chosen quantities of purchased gasoine, and vice versa. As an option, you may want to have students create a demand schedue tabe on paper or on overhead transparencies using data from the Demand Curve for Gasoine and compare their demand Price of Gasoine ($/gaon) $8.00 $6.00 $4.00 Current price (exampe $3.00) $2.00 $1.00 schedue to the one on the chakboard. 5. Ask students if demand curves ike the one shown on the overhead transparency coud be used to describe the demand for other fues, other energy sources, or other goods and services. Have students sketch graphs of demand curves of energy sources such as wood, eectricity, natura gas, propane, heating oi, or other goods and services as exampes. 6. Chaenge students to summarize the aw of demand. Discuss the aw of demand with students and point out that the aw assumes that a factors (such as income, avaiabiity of substitutes, etc.) except price remain unchanged over a short period of time (see Background). 7. Ask students to predict factors that coud change the demand for gasoine. Some factors are isted beow: Changes in income Changes in automobie efficiency Substitution of other forms of transportation for driving, such as taking a bus or a commuter train, waking, bicycing, or joining a car poo Substitution of automobies that use other fues or energy sources, such as diese, propane, or eectricity Discuss with students whether these factors woud shift the demand curve to the right or eft of its origina position. 8. Show students the overhead transparency of the Suppy Curve Quantity of Gasoine Purchased per Week (gaons) for Gasoine. Have students become famiiar with it by having them read a few gasoine prices corresponding to chosen quantities of suppied gasoine, and vice versa. As an option, you may want to have students create a suppy schedue tabe on paper or on overhead transparencies using data from the Suppy Curve for Gasoine. 9. Define the aw of suppy. Ask students if suppy curves ike the one shown on the overhead transparency coud be used to describe the suppy of other fues, other energy resources, or other goods and services. Discuss the aw of suppy with students and point out that the aw assumes that a factors (such as changes in the cost of production, changes in the number of producers, etc.) except price remain unchanged over a short period of time (see Background). 10. Ask students to predict factors that coud change the suppy of gasoine. Some factors are isted beow: New discoveries of crude oi A decine in the amount of oi produced from oi fieds Adoption of new technoogies to produce gasoine more efficienty Changes in the number of companies producing gasoine Changes in the number of oi-producing nations Wars or economic embargoes KEEP Energy Education Activity Guide theme III: effects of energy resource deveopment Energy Prices 4
invoving oi-producing nations Discuss with students whether these factors woud shift the suppy curve to the right or eft of its origina position. NOTE: Some students may mistakeny mention factors that change the demand instead of the suppy for gasoine. Point out the difference between these factors. It may aso hep to ask students to imagine that they are service station owners or producers of gasoine before asking them to consider factors that coud change the suppy of gasoine. 11. Ask students if either the demand curve or the suppy curve aone is sufficient to determine the price of gasoine. Point out that demand and suppy must interact in some way to create an equiibrium (market) price and quantity. Have students suggest ways that the overhead transparencies of the Demand Curve for Gasoine and the Suppy Curve for Gasoine can be arranged to arrive at the equiibrium price and quantity for gasoine. (The equiibrium price and quantity occurs at the point where the two curves intersect.) 12. Direct students to find the quantities of gasoine demanded and suppied at a price above the equiibrium price ($5.00, for exampe). Have students define the term surpus using this exampe and determine the surpus quantity of gasoine (quantity suppied minus quantity demanded). Ask students for reasons why surpuses occur and how they may be aeviated (see Background). 13. Direct students to find the quantities of gasoine demanded and suppied at a price beow the equiibrium price ($2.00, for exampe). Have students define the term shortage using this exampe and determine the amount of the shortage of gasoine (quantity demanded minus quantity suppied). Ask students for reasons why shortages occur and how they may be aeviated (see Background). Cosure Hand out the Suppy and Demand Activity Sheet. Discuss answers to the questions with the cass after students have competed the activity sheet. Ask students to gather recent news artices that have reported on changes in energy prices. Have them identify the reasons given for the price changes, and discuss how these reasons might affect the demand and suppy curves for the fues or energy sources mentioned in the artices. Assessment Formative Were students abe to find a genera reationship between price and quantity demanded (the aw of demand)? Can students state the aw of suppy? Can students show how factors affecting demand and suppy resut in changes in price and quantity? Can students expain what is meant by an equiibrium price and quantity? Can students expain how shortages and surpuses arise between buyers and seers, and how they may be aeviated? Summative Have students appy their understanding of suppy and demand curves to the price and quantity of other energy resources such as eectricity, natura gas, propane, coa, etc. Hand out copies of Ms. Sene s Diemma and have students answer the questions. Discuss answers with the cass. (You may want to have a cass discussion of Question 7 rather than etting students answer this question on their own first.) Extensions Have students interview gasoine station owners, propane deaers, or a oca utiity representative to find out how energy prices are set and what factors can cause them to change. Students coud then show how the price information they obtained is reated to the aws of suppy and demand. Encourage students to investigate gasoine suppy and demand in Europe and other parts of the word, and find out why gasoine prices are often higher in other countries than in the United States. Have students investigate the effects of taxes, government subsidies, and government price contros on the suppy and demand of energy sources. Have students investigate how gasoine and other energy prices have changed since the beginning of the 1970s. The investigation can incude the foowing points: The reationship between events such as the energy crisis of 1973-1974 and sudden increases in energy prices How energy prices in the 1970s compare to today s prices when adjusted for infation Predicting energy prices 25 years from now using past price data 5 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide
Exampes of Suppy and Demand Curve Shifts Increase in Income Shifts Demand Curve to the Right: Equiibrium Price and Quantity Increase Price of Gasoine ($ per gaon) D D new S Increase in Gasoine Production Cost Shifts Suppy Curve to the Left: Equiibrium Price Increases, Equiibrium Quantity Decreases Price of Gasoine ($ per gaon) D S new S $4.00 $4.00 $3.00 $3.00 Quantity of Gasoine (gaons) 15 12 15 Quantity of Gasoine (gaons) A Surpus of 5 Gaons per Customer Occurs at a Price of $4.00 per Gaon (17 12 = 5) Price of Gasoine ($ per gaon) D S A Shortage of 7 Gaons per Customer Occurs at a Price of $2.00 per Gaon (12 19 = -7) Price of Gasoine ($ per gaon) D S $4.00 $3.00 $3.00 $2.00 12 15 17 12 15 19 Quantity of Gasoine (gaons) Quantity of Gasoine (gaons) KEEP Energy Education Activity Guide theme III: effects of energy resource deveopment Energy Prices 6
Suppy and Demand Activity Sheet Answers Answers 1. As the price per barre of oi decreases, the number of barres of oi demanded per week increases. The aw of demand states that, other things being equa or constant, decreasing the price of a good or service increases the quantity of the good or service demanded by consumers. Assuming that other factors are constant, decreasing the price of a barre of oi increases its demand, which is consistent with the aw of demand. 2. Factors that coud change the demand for oi incude changes in income of peope buying gasoine and other oi-derived products; changes in automobie efficiency and the efficiencies of other technoogies that use oi as a fue; substitution of other forms of transportation for driving; substitution of automobies that use other fues; and coder or warmer than norma winters, and their effect on the amount of heating oi used. 3. The tabe shows how the factors in Question 2 shift the demand curve. Factor Increases or Decreases Demand Shifts Demand Curve to the Increased Income Increases Demand Right Decreased Income Decreases Demand Left Increased Efficiency Decreases Demand Left Decreased Efficiency Increases Demand Right Substitutions of Other Form of Transportation Substitution of Automobie That Uses Other Fues Decreases Demand Left Decreases Demand Left Coder Than Norma Winter Increases Demand Right Warmer Than Norma Winter Decreases Demand Left 4. As the price per barre of oi increases, the number of barres of oi suppied per week increases. The aw of suppy states that, other things being equa or constant, increasing the price of a good or service increases the quantity of the good or service produced by producers. Assuming that other factors are constant, increasing the price of a barre of oi increases its suppy, which is consistent with the aw of suppy. 5. Factors that coud change the suppy of oi incude new discoveries of crude oi; a decine in the amount of oi produced from oi fieds; changes in the number of companies producing oi; changes in the number of oi-producing nations; and wars or economic embargoes invoving oi-producing nations. 7 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide
Suppy and Demand Activity Sheet Answers (continued) Factor Increases or Decreases Suppy Shifts Demand Curve to the New Crude Oi Discoveries Increases Suppy Right Decine in Oi Production Decreases Suppy Left Increase in Number of Companies Producing Oi Increases Suppy Right Decrease in Number of Companies Producing Oi Decreases Suppy Left Increase in Number of Oi-Producing Nations Increases Suppy Right Decrease in Number of Oi-Producing Nations Decreases Suppy Left War or Economic Embargo Invoving Oi Producing Nations Decreases Suppy Left 6. The tabe above shows how the factors in Question 5 shift the suppy curve. 7. The two sketches of the suppy and demand curve graphs show a market equiibrium price of $36 and a quantity of 2,600 barres of oi. 8. Increases in demand shift the demand curve to the right, whie the suppy curve does not change its position. The resut is an increase in both the equiibrium price and quantity. Decreases in demand shift the demand curve to the eft, whie the suppy curve does not change its position. The resut is a decrease in both the equiibrium price and quantity. 9. Increases in suppy shift the suppy curve to the right, whie the demand curve does not change its position. The resut is an increase in equiibrium quantity and a decrease in equiibrium price. Decreases in suppy shift the suppy curve to the eft, whie the demand curve does not change its position. The resut is a decrease in equiibrium quantity and an increase in equiibrium price. KEEP Energy Education Activity Guide theme III: effects of energy resource deveopment Energy Prices 8
Suppy and Demand Activity Sheet Answers (continued) Price Per Barre Surpus or Shortage? By How Many Barres? $2 Shortage -9,000 (100 9,100) $8 Shortage -7,000 (300 7,300) $16 Shortage -5,000 (700 5,700) $24 Shortage -3,300 (1,000 4,300) $32 Shortage -1,000 (2,100 3,100) $36 Equiibrium 0 $40 Surpus 1,000 (3,100 2,100) $48 Surpus 3,300 (4,300 1,000) $56 Surpus 5,000 (5,700 700) $64 Surpus 7,000 (7,300 300) $72 Surpus 9,000 (9,100 100) 10. Shortages of oi occur for prices that are beow the equiibrium price. Surpuses occur for prices that are above the equiibrium price. 11. The price of oi woud be expected to rise because a shortage of oi corresponds to its price being ower than the equiibrium price. Raising prices woud reduce the demand for oi unti an equiibrium price is reached. 12. The price of oi woud be expected to fa because a surpus of oi corresponds to a price higher than the equiibrium price. Lowering prices woud increase the demand for oi unti an equiibrium price is reached. 9 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide
Ms. Sene s Diemma Answers Answers 1. The equiibrium price and quantity for gasoine sod at Kero s gasoine station is $4.00 and 400 gaons of gasoine. 2. The quantity demanded for Kero s gasoine after the nearby station s price drop is 360 gaons. Kero now has 40 gaons of gasoine eft at the end of one week after the price drop. The extra amount of gasoine is caed a surpus. 3. Kero now has 50 customers. Since each customer now buys 11 gaons of gasoine, the tota amount of gasoine they demand is 550 gaons. 4. Kero now has a shortage of 150 gaons per week. 5. The $3.90 per gaon Kero now charges for gasoine is not an equiibrium price because at this price, the quantity demanded by customers (550 gaons) exceeds the quantity Kero suppies (400 gaons), which resuts in a shortage. For an equiibrium price, the quantity demanded must equa the quantity suppied. 6. Shoud Kero ration gasoine among her 50 customers, each woud get eight gaons of gasoine per week (400 gaons divided by 50 customers). 7. Possibe soutions to Kero s probem: Reconsider gasoine rationing. Each customer woud then get sighty ess than ten gaons of gasoine per week. Rationing woud aow a her customers to have some gasoine. However, she might ose a few customers. Serve customers on a first-come, first-served basis. This approach is simiar to rationing except not a her customers woud get gasoine. Buy more gasoine from a high-cost suppier and try to cut some of her other business costs. Buy higher priced gasoine at a oss and hope that competitors wi raise prices soon. This soution woud be a good one ony if Kero were sure that other gas stations were aso osing money and were ikey to raise prices soon. Kero can try this soution for ony a short time because she can t stay in business for ong without making a profit. KEEP Energy Education Activity Guide theme III: effects of energy resource deveopment Energy Prices 10
Demand Curve for Gasoine 8.00 7.00 Price of Gasoine ($ per gaon) 6.00 5.00 4.00 3.00 2.00 1.00 0 5 10 15 20 25 Quantity of Gasoine Purchased Each Week Per Driver (gaons) KEEP Energy Education Activity Guide - Student Book theme III: effects of energy resource deveopment Energy Prices 11
Suppy Curve for Gasoine 8.00 7.00 Price of Gasoine ($ per gaon) 6.00 5.00 4.00 3.00 2.00 1.00 0 5 10 15 20 25 Quantity of Gasoine Purchased Each Week Per Driver (gaons) 12 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide - Student Book
Suppy and Demand Activity Sheet Introduction Try these exercises to see how the aws of suppy and demand work together to set oi prices. Law of Demand A demand schedue for oi is given beow. On a piece of graph paper, sketch a demand curve based on this demand schedue. The price per barre shoud be shown on the vertica axis of the graph, whie the barres demanded per week (quantity) shoud be shown on the horizonta axis. Price Per Barre Barre Demanded per Week $72 100 $64 300 $56 700 $48 1,000 $40 2,100 $32 3,100 $24 4,300 $16 5,700 $8 7,300 $2 9,100 Questions 1. State the reationship between the price per barre of oi and the barres demanded per week. Expain how this reationship obeys the aw of demand. 2. List three factors that coud change the demand for oi. 3. For each factor isted in Question 2, state whether it woud shift the demand curve to the right or eft. Give reasons why the demand curve shifted the way it did. KEEP Energy Education Activity Guide - Student Book theme III: effects of energy resource deveopment Energy Prices 13
Law of Suppy and Market Equiibrium A suppy schedue for oi is given beow. Price per Barre Barres Suppied per Week $2 100 $8 300 $16 700 $24 1,000 $32 2,100 $40 3,100 $48 4,300 $56 5,700 $64 7,300 $72 9,100 Sketch a suppy curve, based on this suppy schedue, onto the demand curve graph you sketched earier. Questions 4. State the reationship between the price per barre of oi and the barres suppied per week. Expain how this reationship obeys the aw of suppy. 5. List three factors that coud change the suppy of oi. 6. For each factor isted in Question 5, state whether it woud shift the suppy curve to the right or eft. Give reasons why the suppy curve shifted the way it did. 7. Find the market equiibrium price and quantity for oi. (Hint: ook at the point where the suppy and demand curve intersect.) 8. Use one of the factors from your answer to Question 2 to expain how a change in the demand for oi woud change the market equiibrium price and quantity of oi. 9. Use one of the factors from your answer to Question 5 to expain how a change in the suppy of oi woud change the market equiibrium price and quantity of oi. 14 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide - Student Book
Surpus and Shortage Using the graph of the suppy and demand curves you made for oi and using the oi demand and suppy schedues, determine whether a surpus or shortage of oi exists for each of the prices isted in the tabe beow. Some entries are aready shown. Questions 10. State the reationship between the price of oi above and beow the equiibrium price and the existence of a shortage or surpus. Price per Barre Surpus or Shortage? By How Many Barres? $2 Shortage -9,000 (100 9,100) $8 $16 $24 $32 $36 Equiibrium 0 $40 $48 $56 Surpus 5,000 (5,700 700) $64 $72 11. If a shortage of oi existed, woud you expect the price of oi to rise or fa? Expain. 12. If a surpus of oi existed, woud you expect the price of oi to rise or fa? Expain. KEEP Energy Education Activity Guide - Student Book theme III: effects of energy resource deveopment Energy Prices 15
Ms. Sene s Diemma Ms. Kero Sene owns a gasoine station. She reguary receives 400 gaons of gasoine each week from her distributor. At the existing price of $4.00 per gaon, her 40 reguar customers each bought ten gaons per week. Therefore, at this price, the weeky quantity demanded for gasoine at Kero s was 400 gaons each week and the weeky quantity suppied was 400 gaons. 1. What is the equiibrium price and quantity for gasoine sod at Kero s gasoine station? Kero had been charging $4.00 per gaon of gasoine, about the same as other stations in town. Therefore, reguar customers spent an average of $40 each per week, and Kero received revenue of $1,600 per week. Then one day, another nearby station owered its gasoine price by five cents a gaon to $3.95 per gaon. Kero ost four reguar customers. 2. What is the quantity demanded for Kero s gasoine after the price drop by the nearby station? How many gaons of gasoine does Kero have eft over at the end of one week after the price drop? What is the extra amount of gasoine caed? In order to get her customers back, Kero owered her price to $3.90 per gaon. Her customers returned but so did ten new customers, and her oya customers a decided they woud drive more. Now each customer averaged 11 gaons per week in purchases. 3. How many customers does Kero now have, and what is the tota amount of gasoine they demand? 4. Kero now has a shortage of how many gaons per week? 5. Is Kero s charge of $3.90 per gaon now an equiibrium price for gasoine? Expain. In order to increase her quantity of suppy, Kero woud have to pay a ot more to bring gasoine from a distant distributor. She coud not afford this, but she did not want to eave some of her customers without gasoine. She beieved she had two choices: to ration gasoine by imiting the amount of gasoine each of the 50 customers coud buy every week, or to raise the price to $3.95 per gaon, the price that the other stations now charged. 6. If Kero s gasoine is rationed among 50 customers, how many gaons woud each customer get per week? She decided that rationing may make some customers angry, so she raised the price to $3.95. Her new customers then went esewhere and she had the origina 40 customers again. However, they were buying sighty more than the ten-gaon average that they bought at the $4.00 per gaon price. There was sti a shortage of gasoine. 7. What are the possibe soutions to Kero s probem? Discuss advantages and disadvantages of each. 16 Energy Prices theme III: effects of energy resource deveopment KEEP Energy Education Activity Guide - Student Book