Final answer:
A 20% increase in oil prices is an example of a supply shock, which can lead to higher prices and lower supply. Positive events like new drilling technology or oil discoveries increase supply, reducing prices, while negative events affect supply and demand differently, influencing prices and quantities on the market.
Step-by-step explanation:
If oil prices increase by 20%, this is commonly as an example of a supply shock. Supply shocks are sudden, unexpected events that affect supply, either positively or negatively, with an immediate impact on prices. In this case, a 20% price increase likely reflects a negative supply shock, which translates to a decrease in supply and an upward pressure on prices.
Events such as the invention of new oil-drilling equipment that is cheap and requires few workers to operate would generally be considered a positive shock to supply, leading to an increase in supply and a potential fall in oil prices. Similarly, a major discovery of new oil, like off the coast of Norway, would increase supply, affecting the supply and demand diagram by shifting the supply curve to the right, leading to lower equilibrium prices and higher quantities.
On the demand side, an increase in the demand for oil, for instance from a new, popular kind of plastic or exceptionally cold winters, would shift the demand curve rightward, raising both the equilibrium price and the quantity of oil. Conversely, events such as increased fuel efficiency of cars, economic slowdowns, or additional insulation in buildings reduce demand for oil, shifting the demand curve to the left, leading to lower prices and quantities at equilibrium.