Question

Technological innovations in oil drilling have decreased the cost of producing propane gas.

a. Show this change graphically in a supply and demand diagram for propane. Clearly label your curves and equilibrium price and quantity both before and after the change in technology

.b. If the demand for propane increases significantly during the summer as more people grill outside, what will be the net impact of this change in demand combined with the change from (a) on market equilibrium price and quantity of propane?

Answer 1

a) Technological Innovation that have decreased the cost of Producing propane Gas leads to an increase in Supply of Propane Gas. In the Graph below be can be seen as a rightward Shift in the supply Curve of Propane. This leads to a Decrease in price from P1 to P2 and Increase in Quantity from Q1 to Q2.

b) Increase in demand of Propane in summer leads to a rightward Shift in the Demand Curve of Propane in the Graph below. If this is combined with an increase in Supply of Propane in a), then net impact on Market equilibrium price is uncertain. Market price can increase, Decrease or remain unchanged depending upon the relative size of the shift in both curves. However, in the Graph below, I have shown that the size of Shift of both Supply and Demand curves is equal. Because of this price will remain unchanged.

However, equilibrium Quantity of Propane will definitely Increase.