Question

1. Suppose we are analyzing the international market for oil. Graphically illustrate the impact each of the following would have on demand or supply. Also, show how equilibrium price and quantity have changed. {Note: for each answer provides more explanations}

      a.         Lockdown due to Covid-19 cause many companies to shut down.

      b.         The price of solar power, a substitute for oil falls.

      c.         A discovery of new oil fields.

      d.         Producers expect the price of oil to increase next month

Answer 1

a) Due to COVID-19, many companies are temporarily shut which reduced the usage of oil and tends to reduce the aggregate demand of oil in the world market. It will shift the aggregate demand curve to its left which reduces the price from P to P1 and output falling from Y to Y1.

b) Price of solar power reduced which induces consumers to shift from oil to solar power because both of them have same properties and substitute to each other. It will shift the aggregate demand curve to its left which reduces the price from P to P1 and output falling from Y to Y1.

c) Discovery of new oil fields induces producers to extract more of the oil and gain maximum profit out of it. It will shift the aggregate supply curve to shift to its right from AS to AS1 which will reduce the price level from P to P1 and output level to rise from Y to Y1.

d) As producers expect price to rise next month, they will stock oil now which will raise the aggregate demand of it and shift aggregate demand curve to its right which result in rise in price from P to P1 and output rising from Y to Y1.