Question

supply and demand curve:

Hurricane Katrina closed all refineries on the Gulf Coast, while the Chevy Volt, an electric car, is released. What effect will this have on the market for gasoline? Draw and the graph and explain which curve shift first and, then what cause the second curve to shift. Final what happens to price and quantity at the nee equilibrium point?

Answer 1

The first event, hurricane Katrina, will lead to closure of production facilities which will shift the supply curve of gasoline first, towards left, which will increase price and decrease quantity. The second event, Chevy Volt an electric car, will reduce the demand for gasoline, shifting its demand curve leftward, decreasing both price and quantity. The net effect is a decrease in quantity, while price may rise, fall or stay the same on basis of whether leftward shift in supply curve is higher than, lower than or equal in magnitude to the leftward shift in demand curve.

In following graph, D0 & S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0. As S0 shifts left to S1 & D0 shifts left to D1, they intersect at point B with lower quantity Q1 and price P1. Since in the graph, leftward shift in supply curve is lower in magnitude to the leftward shift in demand curve, P1 is lower than P0.