Demand and supply data for petrol What is the equilibrium price of petrol? What

Question

Demand and supply data for petrol What is the equilibrium price of petrol? What is the equilibrium quantity of petrol traded? Assume that a disruption to supply in the Middle East triggered a decrease in the supply of petrol by 8 million litres a day at every price. If the market for petrol is not regulated by the government What is the new equilibrium price? What is the new equilibrium quantity traded? Now suppose that the government imposes a price ceiling of 60 cents per litre for petrol to avoid consumer hardship resulting from the decrease in supply reported in part (b). How much petrol will be demanded by consumers? How much petrol will be supplied by petrol suppliers? How much petrol will actually be sold? How much is the excess quantity of petrol demanded?

Explanation / Answer

a) i. The equilibrium price is 60 cents per litre. ii. The equilibrium quantity is 16 million litres/day. b) i. Subtract all of the quantity supplied by 8 to obtain the newsupply curve. The new equilibrium price is 70 cents per litre. ii. The new equilibrium quantity is 12 million litres/day. c) i. At 60 cents per litre, consumers will demand 16 millionlitres. ii. Petrol suppliers will only be willing to supply 8 millionlitres (still on the new supply curve). iii. 8 million litres will actually be sold. iv. The difference, 16-8 = 8 million litres, is the excessquantity.

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