Market Equilibrium of Gas Essay

1. Market Equilibrium of Gas

Every market in the economy is at an equilibrium stage.  The economist Adam Smith stated that in each market there is an invisible hand that places the product or service at an equilibrium position.  Sometimes in the market surpluses or shortages arise that lead to disequilibrium in the market.  For instance, in Arizona, the disequilibrium was due to a shortage in gas supplied.  In the following sections we will explain the effect of such shortage in the gas market.

1.1  Influence on Quantity Supplied

The scarcity of gas that arose in the market led to a decrease in the quantity supplied.  As a result, a leftward shift arose in the quantity supplied from Qs to Qs1 to reflect the decrease in quantity supplied as shown in the graph below.  Such short-term movement is done with the presumption that all other variables remained constant.

Figure 1

The graph presented above also reveals that effect of quantity from the leftward shift in quantity supplied.  This directed to a decrease from Q to Q1 as noted in such figure.

1.2  Influence on Quantity Demanded

We contended in the first section that in the long run the market will not stay in disequilibrium position.  Therefore shifts in the quantity demanded shall also arise in order to adjust the market.  In situations of shortages, like the case presented, the quantity demanded will also shift leftwards to accommodate the shift in quantity supplied, assuming all other variables remained constant.  This shift from Qd to Qd1 is shown graphically in Figure 1.1.

Figure 1.1

Figure 1.1 shows that the leftward shift in quantity demanded directed to a change in quantity at Price P.  Indeed the quantity decreased from Q to Q1 as denoted in the figure above.

1.3  Reaching the Equilibrium Position

Consideration of the quantity supplied and quantity demanded have been examined separately at this stage.  However, in market analysis, short-term variations in variables, like shortage in quantity supplied should be considered collectively in the assignment in one graph.  This is illustrated in Figure 1.2 below:

Figure 1.2

As we can see the leftward shift in quantity supplied from Qs to Qs1 led to a disequilibrium position.  However, the invisible hand denoted by Adam Smith will direct another leftward shift in the quantity demanded from Qd to Qd1.  This will enable the gas market to reach another equilibrium position.  Such shifts led to a decrease in quantity from Q to Q1, which arose from an increase in price from P to P1.

WE ought to take into account the shape of the quantity demand curve.  As one can note the curve is quite upward sloping.  In economics, the technical term for such curve is a price inelastic demand curve.  A price inelastic demand curve is not highly responsive to changes in price as shown by the low gradient in Figure 1.2.  This arises from a number of features, like necessity for the service, lack of substitute products and low proportion of income spend on service.  Due to such factors, the customer or manufacturing firm is willing to pay more for such service due leading to a low responsive effect to changes in prices.

 

References:

 

Hirschey M. & Pappas J. (1995).  Fundamentals of Managerial Economics.  Fifth Edition.  United States:  The Dryden Press.

 

Maunder P.; Myers D.; Wall N. & Miller R. (1993).  Economics Explained.  Second Edition.  London:  Collins Educational.

 

Smith A. (2003).  The Wealth of Nations.  Germany:  Bantam Classics.