Question

What happens to the price of gasoline if a big oil reserve is discovered?

a. The price will increase

b. No change in the price

c. The price will decrease

Answer 1

Answer-option c. The price will decrease.

If a big oil reserve is discovered , then more oil will be available to produce more gasoline ( as gasoline is produced from oil ). As such, the Supply of gasoline will INCREASE. As increase in supply is caused due to a factor ( discovery of oil reserves) other than the own price changes of gasoline, this will shift the supply curve of gasoline to the RIGHT. This RIGHTWARD SHIFT of the Supply curve of gasoline with an unchanged market Demand will pull the price down. As supply of gasoline has increased with demand remaining the same, a surplus will be created at the original Equilibrium price. Buyers seeing the unsold stock of gasoline may begin to ask for lower price. Suppliers, o the other hand, may start offering lower prices in an attempt to sell the gasoline. In both the cases, a downward pressure is exerted on the price and PRICE WILL DECREASE. As price wil fall ,quantity demanded will increase ( according to the law of demand) and surplus will start disappearing from the market and the market will again be in equilibrium where demand equals supply.

Option a is incorrect because price increases due to shortage. As a result of a discovery of oil reserve, the Supply of gasoline will increase and hence at the original Equilibrium price, a surplus will occur which will pull down the price.

Option b is incorrect because a surplus leads to a downward pressure on the price and as such, price will change. It will not remain unchanged.