Question

In 2018, a cold front in Barbados increased both the demand for water heaters and gasolines. The usage of gasoline was 581 tonnes, an increase from 499 tonnes in the previous year.      The Petroleum Company of Barbados advised Government officials that demand could outweigh supply and asked companies to increase the supply. They also asked major gasoline users, such as power plants, to reduce demand.

ii.  Illustrate the effect of major gasoline suppliers increasing supply as well as users reducing their demand.

Answer 1

A fall in user demand shifts demand curve leftward, decreasing price and decreasing quantity. A simultaneous increase in gasoline supply shifts supply curve rightward, decreasing price and increasing quantity.

The net effect is a definite decrease in price. However, quantity may increase, decrease or stay the same depending on relative magnitudes of the shifts.

In the graphs, D0 and S0 are initial demand and supply curves of bond, intersecting at point A with equilibrium price P0 and quantity Q0.

(I) Leftward shift in demand is more than the rightward shift in supply: Quantity is lower

In following graph, D0 shifts left to D1 and S0 shifts right to S1, intersecting at point B with lower price P1 and lower quantity Q1.

Р SC 5 Pe Pi DI 8. So 8

(II) Leftward shift in demand is less than the rightward shift in supply: Quantity is higher

In following graph, D0 shifts left to D1 and S0 shifts right to S1, intersecting at point B with lower price P1 and higher quantity Q1.

р So Po SI B DO go 91 8

(III) Leftward shift in demand is equal to the rightward shift in supply: Quantity is the same

In following graph, D0 shifts left to D1 and S0 shifts right to S1, intersecting at point B with lower price P1 and same quantity Q0.

Р so Po A S, ܒܘ B Di 90 S