Electric cars and gasoline

The chain in words

1. Step 1

   Before the switch

   Gasoline sells at 3 dollars a gallon. The horizontal axis is millions of gallons sold per day. The vertical axis is the price per gallon. The market clears at E₀.

2. Step 2

   Demand shifts left

   Electric cars run on electricity, a substitute for gasoline. Drivers who switch want less gasoline at every price, so demand shifts left. At 3 dollars, refiners still supply the old volume, but buyers now take about a fifth less. Unsold gasoline piles up: a surplus.

3. Step 3

   Price falls to clear the market

   Stations cut prices to empty their tanks. As the price falls, refiners cut output, a movement along the supply curve. The market settles at E₁ with a lower price and fewer gallons sold.

Takeaway. A fall in demand lowers both the price and the quantity: they move together.

Draw it yourself

More on the supply and demand graph