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The market for gasoline has changed in a couple significant ways over the last few years:...

The market for gasoline has changed in a couple significant ways over the last few years: new technologies have decreased the costs associated with producing gasoline, and automobiles are becoming more fuel efficient. Describe how these changes affect the supply of and demand for gasoline? What is the overall effect on equilbrium price

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Answer #1

Gasoline market has undergone huge changes over the last years. Let's analyse the changes with respect to demand and supply.?

* There is a decrease in the cost of production due to the introduction of new technologies. Cost of production is an important determinant of supply. A decline in the cost of production obviously results in an increase in the supply of gasoline.

* vehicles are becoming fuel efficient. Higher the fuel efficiency, lower the demand for gasoline.

These changes can be further explained with the help of a diagram.

SS represent the supply of gasoline and DD represents the demand for gasoline. P is the equilibrium price and Q is the equilibrium quantity determined by the intersection of DD and SS. When supply increases, supply curve shifts to right from SS to S1S1 . Due to the fall in demand, demand curve shifts to the left from DD to D1D1. However fall in demand will be less than the rise in supply.Intersection of D1D1 with S1S1 leads to a rise in equilibrium quantity from Q to Q1 and a decline in equilibrium price from P to P1.

Therefore, given changes leads to a fall in equilibrium price.

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