Question

Respond to each short answer question using two to three well-constructed paragraphs (150 – 250 words) containing specific details and examples that support your understanding of the concepts.

1. Assume that gasoline is a normal good. What would happen to the market for gasoline in each of the following cases:

1. The price of automobiles rises
2. Consumers believe that gasoline prices will rise in the near future.
3. U.S. producers increase the production of gasoline
4. Oil field workers win a pay increase

Answer 1

i) Increase in price of automobiles decreases demand of gasoline in the market because gasoline and automobiles are complementary goods.

Complementary goods are those goods which jointly satisfy a particular want of consumer. Example; Automobiles and gasoline, car and petrol.

When demand of goods decreases due to change in factors other than the price of good itself then it causes shift of demand curve. Increase in price of automobiles decreases demand of gasoline in the market and thus shifts demand curve leftwards.

Leftward shift of demand curve decreases equilibrium price and quantity demanded.

ii) Demand of gasoline increases today when consumers believe price of gasoline rise in future. This shifts demand curve rightwards today. This causes increase in equilibrium price and quantity of gasoline in the market.

iii) When producers increases production of gasoline then supply of gasoline increases which shifts supply curve rightwards. Rightward shift of supply curve decreases equilibrium price and increases equilibrium quantity of gasoline in the market.

iv) When workers income increases then demand of gasoline increases because gasoline is a normal good. Normal goods are those goods who have positive income effect. Increase in income increases demand of normal good and vice-versa.

Increase in income increases demand of gasoline and shifts demand curve rightwards.

Equilibrium price and quantity both rises.