Answer to Question #306179 in Microeconomics for Elaine

Question

During the month of March 2020, the following two shocks occurred in the market for petrol. 

• Major oil producing countries (most notably Saudi Arabia and Russia) moved to increase their crude oil production. Crude oil is the main input to the production of petrol. 

• Road traffic across Australia fell significantly. This is the result of the government's lock-down policies to fight the spread of coronavirus spread. 

• Considering the two shocks above, determine how the demand and supply of petrol would change. Clearly explain why such change(s) would occur. (1 + 1 = 2 marks) 
• Explain how the demand curve and the supply curve will shift as the result of the shocks above (1 mark)
• Clearly explain how the equilibrium price and quantity of petrol would change as a result. (1 mark)
• For an average petrol station on Glenferrie Road, how would its revenue in March change, in comparison with February (when there was no shock)? Clearly explain your answer (1 mark). 

Answer 1

In the first case, the supply of gasoline will increase, as the supply of oil has increased.

In the second case, the demand for gasoline will decrease, as the government's policy will significantly reduce the demand for road transport.

In the first case, the supply curve will shift to the right. In the second case, the demand curve will shift to the left.

In the first case, the equilibrium price will fall, the equilibrium quantity will increase.

In the second case, the equilibrium price and the equilibrium quantity will increase.

It is unknown at this time what average gas station on Glenferry Road will do after that (But we know that income is the price multiplied by quantity). We are unable to obtain information on whether the price will increase or decrease as a result. But we can say unequivocally that the quantity of products sold will increase.