Question

Explain what would happen to either the supply curve, the demand curve, the price of gasoline and the quantity of gasoline traded at equilibrium if the following scenarios occurred. Provide a simple sketch of the appropriate shift in the appropriate curve.

4. If President Johnson (now “who is he?” hypothetically) relaxed the rules on “fracking” to extract oil from the ground, leading to higher efficiencies and lower costs in the production of oil, what would happen in the market for gasoline?

Answer 1

The supply curve shifts right.

Why does the supply curve shift right?

If President Johnson's rules lead to higher efficiencies and lower costs, then firms would be able to produce more output for the same cost. Recall that the supply curve is just the marginal cost curve for the firm. To capture the fact that higher level of output can be produced at the same cost, you just shift the cost curve right. If the marginal cost curve shifts right, so does the supply curve.

Graphically, the change would look as follows:

As you can see above, the supply curve would shift right while the demand curve would remain unchanged. Also the price level at the new equilibrium would lower and the quantity would be higher.