Question

Assume gasoline is sold in a competitive market, the equilibrium price is $50 per barrel, and the equilibrium quantity is 1000 barrels.

(a) Using the numerical values above, draw a correctly labeled graph of the gasoline market and show each of the following.
(i) The equilibrium price
(ii) The equilibrium quantity
(b) At a price of $40 per barrel, will there be a surplus or a shortage in the market? Explain.
(c) Assume new oil wells are discovered. On your graph from part (a), show how this change will affect the equilibrium price and quantity in the market for gasoline.
(d) Assume instead there is an increase in the price of gasoline-operated automobiles. How will this change affect the market for gasoline? Explain.
(e) If both changes in part (c) and part (d) occurred simultaneously, what will happen to the equilibrium price and quantity of gasoline?

Answer 1

(a) Please find attached, the required graph showing the equilibrium price at $50 per barrel

(b) There will be a shortage

(c) Please find attached, the graph showing change in demand due to increased supply from the new oil well

(d) When there is an increase in the price of gasoline operated automobiles, there would be a downward shift in demand while supply would remain constant, and the equilibrium price will decrease

(e) The combined effect will be a further reduction in the price per barrel

Step-by-step explanation:

The equilibrium price

(a) Please find attached, the required graph

(b) As shown on the graph, in a competitive market, at a price of $40 per barrel, there will be a shortage in the market due to the amount of money available will be more than the total price of the number of barrel for sale, because the equilibrium price at which the amount of money available in the market is equal to the total price of the barrels supplied gives the amount of money people a willing and able to spend on a barrel

(c) If new oil is discovered, the number of barrels supplied will be more than the amount of money available to purchase a barrel and the equilibrium price will drop

(d) When there is an increase in the price of gasoline operated automobiles, there would be a downward shift in demand while supply would remain constant, and the equilibrium price will decrease

(e) If both oil is discovered and there is an increase in the price of as operated vehicles, the result will be a further reduction in the price of a barrel of oil