Question and Answer Microeconomics

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 4 (1306 words) Published: October 21, 2011


Principles of Microeconomics


Abdulla Waheed Imad
+960 962 1214

Ahmed Mohamed
Villa Collage - Faculty of Computing and Business Management JULY 2008 SEMESTER

Assignment Statement
Fuel is one of the main inputs for many sectors in the world’s economy. Therefore, when a war breaks out in Country A. which is the main producer for fuel in the world it causes fuel supply disruptions in the world. Question 1

What will happen to the price and quantity equilibrium for fuel following this event? Explain. Answer:
Since County A is the main producer of oil in the worlds market; due to the war in country A it will face difficulties in the production of oil. This will result a decrease of oil supply in the worlds market as a result the price of oil will be increased at the same time due the increase of this oil price the demand for oil will fall. However because oil is nearly a necessity it is an inelastic product. The percentage change in quantity demanded will be less than the change in price of oil. Due to the limitation of oil supply in the worlds market the supply curve will shift to the left resulting to the equilibrium quantity to fall and the price to rise which forms a new price and quantity equilibrium point. The below figure illustrates the effect on the equilibrium price and quantity of oil in this market situation. Oil Market

Figure 1
Due to the decrease in supply of oil to the worlds market it will result in a shift of supply curve to the left as shown in the figure1 from S to S1. Due to the shift of supply curve to the left it will cause an increase in the price of oil from P to P1. This will result in changing the price and quantity equilibrium from P,Q to P1,Q1. As shown in the figure it forms a new equilibrium pint which...
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