A couple of months after Hurricane Katrina, an article in The New York Times contained the following passage: “Gasoline prices—the national average is now $2.15, according to the Energy Information Administration—have fallen because higher prices held down demand and Gulf Coast supplies have been slowly restored.”1 The statement about supply is entirely correct and explains why gas prices came down. But the statement about demand confuses two concepts you learned about in this chapter.

a. What two concepts does the statement about demand seem to confuse? Explain briefly.

b. On a supply and demand diagram, show what most likely caused gasoline prices to rise when Hurricane Katrina shut down gasoline refineries on the Gulf Coast.

c. On another supply and demand diagram, show what most likely happened in the market for gasoline as Gulf Coast refineries were repaired— and began operating again—after the Hurricane.

d. What role did the demand side of the market play in explaining the rise and fall of gas prices?