Question

Use supply and demand analysis to evaluate each of the situations below. Illustrate each market graphically. Indicate the factor affecting demand or supply that is involved. Be sure to state what happens to the equilibrium price and quantity.

1. When oil is produced, natural gas is produced as a byproduct. How will the recent fall in the price of oil affect the market for natural gas?

Answer 1

Price is not a determinant of supply or demand. It changes quantity supplied or quantity demanded only. Fall in the price of oil will decrease the quantity supplied of oil, because the supply curve shows a positive relationship between price and Quantity supplied. As quantity supplied of oil decreases, supply of natural gas decreases because oil and natural gas are produced together. Decrease in supply of natural gas shifts the supply curve leftward in the market for natural gas. As a result, equilibrium price of natural gas increases and equilibrium quantity of natural gas decreases.