Math Extension Individual Assessment

Explain the reason for using Demand or Price as an output or input variable. Cite each of these
graphs as examples of either Economics model (traditional or supply-side) and explain which
one would be more appropriate for the gas market.
The traditional model, which is described to be closely related to the Keynesian economics, is
the theory that economic output is strongly influenced by aggregate demand (Dr. May) while
the Supply-side theory completely contradicts that idea by claiming that demand is largely
irrelevant (Harper). I believe that the traditional model would be more appropriate for the gas
market due to certain economic concepts such as scarcity, incentives as well as utility.
On the graph that I have produced using the data provided on demand and price, it definitely
showed a positive relationship between the demand and price; the more consumers demand of a
product, the higher the prices will be set for that product. This idea makes perfect sense when
regarding the incentives of firms. According to Naked Economics, firms attempts to maximize
profit as their main incentive (NAKED ECONOMICS CITATION). Therefore, if theres a high
demand of something, firms will raise the price in order to gain the most profit out of it. This
also makes sense the other way around; if the overall public demand is low for a certain product,
then firms will be pushed to lower the price in order to entice the public to buy that product.
In regards to competition, it also validates firms or businesses abilities to create some sort of
balance. For instance, lets say there was only one available gas station within a town. Since this
station is the only one within the towns radius, it has a pretty high demand from the towns
people and is therefore making a lot of profit. Now a new gas station is introduced into the
picture, giving the towns people a new option. Due to the nature of differing preferences, the
demand for the original gas station decreases to compensate for the new one. Since few sellers
compete to attract favorable offers from prospective buyers (Concise Encyclopedia of
Economics, 2nd Ed.), competition is bound to follow. Keen sellers cut prices to attract buyers an

Demand vs. Price

4
3.5
3

f(x) = 0x + 0.73

2.5
Price

2
1.5
1
0.5
0
1000

1500

2000

2500

3000

Demand

It says that over-production and under-production are not sustainable phenomena. Supply-siders
argue that when companies temporarily "over-produce," excess inventory will be created, prices
will subsequently fall and consumers will increase their purchases to offset the excess supply.
Under such a dynamic - where the supply is vertical - the only thing that increases output (and
therefore economic growth) is increased production in the supply of goods and services as
illustrated below:
Dr. May. http://www.cavemannews.com/Supplysidevsdemandsideeconomics.htm

Harper. http://www.investopedia.com/articles/05/011805.asp