Question

Describe the effect of each of the following events on either the demand or supply of gasoline in the USA. Further indicate the likely direction in the amount of gasoline exchanged AND the expected market price (both) when: a. domestic incomes fall. b. the price of electrical automobiles falls. c. A new shale oil field is discovered and put into service. d. The average price of rice falls in Japan. (Hint: Provide answers to all parts of the question)

Answer 1

a. When domestic incomes fall in any economy such as USA, it means low purchasing power of people and also falling GDP rate. In that scenario, demand of gasoline will decrease if cost of gasoline is high. If there has been decline in the gasoline price, then demand or supply of gasoline in the country will be more or less elastic.

b) Any fall in electrical automobiles in USA results fall in sale of conventional automobiles which will reduce demand of gasoline in the country. If any country is importing large chunk of indigenous fuel requirements from abroad then fall in demand of fuel products will also reduce import quantity of fuel products.

c. If a new shale oil field is discovered in USA and is operational, then total output of gasoline will rise. In that case, there may be small or steep fall in the gasoline price depending upon variation in consumer demand over a period of time.

d) We know demand of any product depends upon price, quality of the product, substitutes etc. Here both rice and gasoline are different product and are used for different price. Therefore, any change in average price of rice in Japan will not alter demand or supply of gasoline in United States.