Question

4. Suppose war broke out in the Middle East and gasoline and diesel fuel prices began rising. Jeepney drivers and bus owners feared future oil shortages if war cut off the flow of oil, and they rushed to fill up their fuel tanks. In this case, as the price of fuel in- creased, jeepney drivers and bus owners bought more, not less. Is this an exception to the law of demand? Use the terminology of the demand and supply model to explain your answer.

Answer 1

4. As war broke out in the Middle East and gasoline and diesel prices began rising. Now if jeepney drivers and bus owners fear that if war cut off the flow of oil, then the supply of oil in the Middle East will decline which will result in a leftward shift of the supply curve and hence the equilibrium price of fuel price will increase and the quantity of fuel will decline. Now Jeepney drivers and bus owners fear that if the shortage continues then the expected price of diesel and gasoline will be higher than the present price of fuel and the expectation about higher future price of gasoline will increase the present demand for gasoline and hence the demand curve for fuels will shift rightward from D1 to D2 and as the economy moves from point A to point B, equilibrium price of fuel will increase from P1 to P2 and the equilibrium quantity of fuel will increase from Q1 to Q2. Here because of higher expected price of fuels, demand increases even if present price rises. Hence this is not an exception to the law of demand.

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