Friedman provides several good examples of the market forces of supply and demand along with
some other principles of economics, all of which are essential points in the class.
To begin with, the first case in the article shows the relationship between supply and
price. Since Colonial Pipeline, estimated to deliver about 40% of the gasoline consumed on the
East Coast, had partially closed the major artery, gasoline made obvious daily gains. In other
words, the decrease in supply of gasoline resulted in its rising price. Does such situation appear
accidentally? No, of course not. The economics principle of the relationship between supply and
S2
Price of gasoline
New S1
equilibrium
P2
P1 Initial equilibrium
Demand
Q2 Q1 Quantity of gasoline
The pipeline outage reduces the quantity of gasoline able to be delivered, thus shifting the
supply curve to the left. The supply curve shifts from S1 to S2, which causes the equilibrium price
of gasoline to rise from P1 to P2 and the equilibrium quantity to fall from Q 1 to Q2. Now we can
safely predict that the price of gasoline will fall when Colonial Pipeline reopens next week
Second, the article states that oil has benefited from much larger gains in refined products
such as gasoline, which gained more than 5% in one day. In this case, since no evidence indicates
that the supply of oil decline, why is the price of oil influenced by the price of gasoline? To
1
answer this question, we should think carefully about the relationship between oil and gasoline.
In fact, gasoline is a fuel derivative of oil, that is, we cannot produce gasoline without oil.
According to the principle that people respond to incentives, when the price of gasoline rises,
producers tend to produce more gasoline in order to make more money. Therefore, the demand of
oil increases, which causes a rise in oil price. More details of the relationship between demand
Price of oil
Supply
P2 New equilibrium
Initial
P1 equilibrium
D2
D1
Q1 Q2 Quantity of oil
Just as we have learned, an event that raises quantity demanded at any given price shifts
the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here
a higher price of gasoline push producers to demand more oil. The demand curve shifts from D 1
to D2, causing the equilibrium price to rise from P 1 to P2 and the equilibrium quantity to rise from
Q1 to Q2. Similarly, the price of oil is influenced by the price of other refined products, which
Finally, the higher price in the oil market provides an incentive for Nigeria and Libya to
ramp up oil exports. Libya is also planning to resume exports from its Ras Lanuf port and a
tanker is now due to be loaded with 600,000 barrels of crude. Making such decisions requires
Nigeria and Libya to trade off the goal of selling more oil to foreign countries against a higher
cost. In the end, both countries chose to increase oil exports. In this way, the price of oil would
start to drop. Let us have a deeper look of such change in the figure below:
2
S1
Price of oil Initial S2
equilibrium
P1
P2 New equilibrium
Q1 Q2 Quantity of oil
The rise in oil exports increases the quantity of oil supplied, shifting the supply curve to
the right. The supply curve shifts from S 1 to S2, which causes the equilibrium price of gasoline to
decrease from P1 to P2 and the equilibrium quantity to grow from Q 1 to Q2. In conclusion, an
event that increases quantity of supply at any given price shifts the supply curve to the right. The