The price of oil increased significantly during the 1970s due to two major events. First the oil embargo from Arab countries in the Middle East to Western countries following their support for Israel during the Yom Kippur War (1973) and second the Iranian Revolution in 1979. Oil is refined to produce gasoline for cars and as the price of oil increased during the 70s, the cost of producing gasoline went up as well. These two events during the 70s are commonly known as "Oil Shocks". More generally, the "Oil Shocks" are examples of what are termed negative supply shocks that you will learn in your macroeconomics courses.

a. Illustrate the effect of the "Oil Shocks" on the market for gas by using supply and demand curves. (Recall oil is an input used to produce gas.) Do the oil shocks produce a surplus or shortage of gas?

b. In the face of skyrocketing gas prices, the Nixon administration in 1973 imposed a maximum price on gas. (The depressed pump prices imposed during 1973 went through several iterations during the 80s.) The price ceiling on gas brought about long lines at gas stations and a shortage of gas during the 70s. Now illustrate this binding price ceiling on gas in your plot from part a.