Draw the aggregate demand and aggregate supply of petroleum after COVID-19

Expert Solution

Due to Covid-19, there is nation wide lockdown. The number of vehicles running on the street are almost nil. Many industries which use petroleum are shutdown due to the crisis. There is only a very limited demand. There is a huge fall in aggregate demand for petroleum which is which AD has shifted to the left from AD1 to AD2. On the other hand petroleum producing units are working with a reduced labor force as most workers are unable to go to work. However petroleum production is in general a capital intensive production. Due to fall in labor force there will a slight fall in aggregate supply from AS1 to AS2. However the fall in AS is less than the fall in AD. This is a reasonable assumption as the factors responsible for decrease in AD are rationally higher in magnitude than the one that leads to decrease in AS. Ultimate result is a huge fall in quantity of petroleum and a fall in petroleum prices. AD2 and AS2 are aggregate demand and supply after Covid-19.

P.S-You can draw the AD2 with a more larger gap to AD1 in your diagram

Rahul Sunny answered 2 years ago

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