Answer to Question #73652 in Microeconomics for juhi

Question

1 Consider two markets; the market for petrol in Australia and the market for used Holden Commodores in Australia. For the purposes of this question please regard Holden Commodores as large cars that consume a lot of petrol. Suppose that a war in the Middle East causes the price of crude oil to increase (crude oil is the major input used to produce petrol). To answer this question, draw two demand and supply diagrams (as specified below) and for each diagram please provide a written explanation. For each diagram you must label which market it refers to, show clearly how the demand and/or supply curve shifts, and clearly show how the equilibrium price changes.
(a) First, draw a diagram showing what happens in the Australian petrol market (4 marks).
(b) Then, draw another diagram showing what happens in the Australian used (second-hand) Holden Commodore market (6 marks). Hint: Think carefully what happens to the supply curve as well as what happens to the demand curve.

Answer 1

Suppose that a war in the Middle East causes the price of crude oil to increase.
(a) In the Australian petrol market the supply of petrol will decrease, so the equilibrium price for petrol will increase, the equilibrium quantity will decrease.
(b) In the Australian used (second-hand) Holden Commodore market the supply will not change, but the demand will decrease according to increase in price for petrol, because such cars and petrol are complements, so the equilibrium price for Holden Commodores will decrease, the equilibrium quantity will decrease too.