Question

As a result of increased tensions in the Middle East, oil production is down by 1.21 million barrels per day—a 5 percent reduction in the world’s supply of crude oil. Explain the likely impact of this event on the market for gasoline and the market for small cars

Short answer

Answer:

The demand for tiny cars will decrease. The price of gasoline will drop. Smaller cars will be in higher demand.

Step-by-step solution

Market for gasoline: 

When there are changes in the availability of a commodity, surely, there will be a change in its price. When the supply of raw materials is less, the price tends to increase. Similarly, if the supply of goods exceeds the demand of consumers, prices are likely to be lower or lower.

In this case, if the supply of crude oil decreases for the same amount of demand, the price of crude oil will decrease. The decrease in crude oil supply will also lead to a decrease in the supply of gasoline, which will cause the supply curve for gasoline to shift leftward. The decrease in the quantity of gasoline caused the increase in price and the decrease in the number of available gallons.

Market for small cars:

Gasoline and small cars have a strong relationship. This is because a small car is powered by gasoline. They complement each other as are used jointly. When gasoline prices go up, people tend to buy smaller cars. Small cars are more fuel-efficient and cheaper to operate. This will cause the demand curve for small cars to shift to the left.

The graph below shows the number of accidents in a particular year.