Question

In 2018, a cold front in Barbados increased both the demand for water heaters and gasolines. The usage of gasoline was 581 tonnes, an increase from 499 tonnes in the previous year.      The Petroleum Company of Barbados advised Government officials that demand could outweigh supply and asked companies to increase the supply. They also asked major gasoline users, such as power plants, to reduce demand.

i. Assuming the Petroleum Company of Barbados did not issue a directive for an increase in supply and a decrease in demand, explain the problem that would exist in the economy and how would this be corrected over time.

Answer 1

Since there is no isssued directive or official instructions , companies will not increase supply to take advantage of this situation and increase price of water heaters and gasoline . We know that during cold weather these goods have inelastic demand . So increasing price would cause increase in total revenue . Thus supply will be supressed or increased slightly and price will rise due to excessive demand .

Major gasoline users , such as power plants , will not decrease their demand , since when gasoline and water heaters become costly people will demand more electric heaters or heaters that run of electricity . This will cause demand for electricity to rise indirectly . Also power plants buy gasoline in bulk and usually get at a lower price than market price . Power plants will not reduce demand for gasoline and face loss due to low production .

Both of this scenario will further accentuate the problem of excessive demand and the problem of high price for gasoline will exist in the economy . Over time it will be corrected by new gasoline producers entering the market and increasing supply , people fining other alternatives etc .