Question

A barrel of oil can be used to produce both gasoline and asphalt. If the price of gasoline falls, the supply of asphalt _____ and asphalt prices______.

Answer 1

A barrel of oil can be used to produce both gasoline and asphalt. If the price of gasoline falls,the supply of asphalt would increase and asphalt prices would ultimately decrease.This can be explained as follows:-

The law of supply states that ceteris paribus,at higher prices more would be supplied and at lower price lesser would be produced/supplied.There is a positive relationship between the price and the quantity supplied in the market of any commodity.This is so because the ultimate objective of any business is to earn more and more profit.So the producers would maximise their earnings when they get higher prices for the product they produce.

Here the prices of asphalt remains constant but the prices of gasoline falls.As per the producer's expectations,they would get comparatively more price in producing asphalt than producing gasoline.So they can earn more by focusing more on asphalt and less on gasoline.As a consequence,they would produce more of asphalt,so the quantity supplied of asphalt in the market would tend to increase as per the existing market conditions but as per the existing demand scenario,quantity supplied would exceed the quantity demanded and ultimately it will force the price of asphalt also to decrease/fall.