Answer to Question #280625 in Microeconomics for DAVID

Question

There was the so called first oil shock in 1973-1974. As a result, the price oil increased in four times. Consequently, price of gasoline increased as well. It reached in people buying smaller economic cars, Demand for large cars therefore decreased which resulted in lower number of large cars produced at lower price. Can you present this situation graphically using the concept of demand and supply and equilibrium?

Answer 1

Oil demand shocks generated by global economic activity result in a transient boost in real GDP for all economies, but oil-specific demand shocks result in a temporary decrease in real GDP for all economies. When oil prices rise, however, the effects of exogenous oil supply shocks vary greatly between countries. Whereas net oil- and energy-importing economies all experience a permanent drop in economic activity as a result of a supply shock, the impact on net energy exporters is negligible or even positive. The rate of inflation pass-through varies significantly between oil-importing economies, and it is highly dependent on the presence of second-round impacts from rising wages. Using the concepts of demand and supply, as well as the concept of equilibrium, I have visually depicted this issue.