Question

The average retail price of regular gasoline used by motor vehicles decreased from $3.85 per gallon in March 2012 to $1.76 per gallon in February 2016. The following may or may not be a reason for this decline. Using demand and supply analysis, explain why or why not.

(1)    Use of a new technology called “fracking” to extract oil from the ground

(2)    The economies in most of Europe were deteriorating and heading toward a recession

(3)    OPEC, the cartel of oil producers, decided to keep production of oil at record levels

(4)    Increasing use of hybrid/electric cars in the US

(5)    Lower profits for Exxon, Shell and other producers of gasoline.

The significant drop in price in gasoline used by automobiles may or may not have had the following effects. Explain why or why not.

(1)    Shut down of some oil refineries producing gasoline

(2)    Decrease in sale of hybrid/electric vehicles

(3)    Increase in sale of gas guzzler cars, such as SUVs

(4)    Increase in number of vacations taken by automobile

(5)    Higher price of cross country trips by bus

Answer 1

If the price of regular gasoline have fallen, it is possible only for 2 reasons. One is there is a rise in supply of gasoline or there is a decline in demand of gasoline.

a) New technology would raise the supply of gasoline in the market.

b) Due to recession in Europe, people there have less money in their hands to spend on good which reduces the overall demand of gasoline.

c) To keep production at record levels, supply must have to rise. Thus supply curve would shift rightwards.

d) Increasing use of Hybrid cars in US would reduce the usage of gasoline which would reduce the overall demand of gasoline in the market.

e) Lower profits for gasoline producers is not a reason for falling prices. As if the profits have fallen, producers must have raised their prices to compensate their losses.

Reduced prices of gasoline will have its effect on:

a) This would be true for some refineries as the price level which is prevailing in the market could be lower than their average cost which makes a situation of loss.

b) This could be true as reduced prices of gasoline would attract consumers to go for gasoline cars as it would cost them low now to use.

c) This would be true as there is reduction in price of gasoline which would induce gas guzzler consumer to purchase it more.

d) This would be correct as people now find it cheaper to go on trips due to reduced gasoline prices.

e) Cross country trips is dependent upon many factors apart from the gasoline prices. Thus if we only take into account the gasoline prices, we cannot say anything about cross country for sure.