Economic Case Study: Impact of Petrol Prices on Equilibrium Price and Quantity of Motor Cars

This economic case study analyses the impact of petrol prices on the equilibrium price and quantity of motor cars. It explains how the increase in petrol prices affects the equilibrium price and quantity of motor cars. The study also discusses the price elasticity of demand for petrol and the factors that make it inelastic. The scenarios are explained using economic concepts and models. The subject is economics and the course code is not mentioned. The college/university is not mentioned.

Running head: ECONOMIC CASE STUDY
ECONOMIC CASE STUDY
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction................................................................................................................................2
Scenario One..............................................................................................................................2
Scenario Two.............................................................................................................................6
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
The purpose of this assessment is to analyse economic principles and models. The
decision making by individuals, enterprise and government is evaluated by using economic
concepts and knowledge. The economic outcomes in market and its impact by the market
structure and macroeconomic environment is described in this study. This assessment focuses
on two scenarios. The first scenario highlights on how increase in petrol prices impact the
equilibrium price and equilibrium quantity for motor cars. This scenario is explained with the
help of competitive market theory. The second scenario explains about the price elasticity of
demand for petrol.
Scenario One
1)a) Recent studies reflect that the Australian petrol prices are at highest level for the last
three years. The petrol prices increased at highest level since the year 2015 owing to
increasing geopolitical tensions and supply cuts from OPEC and non- OPEC producers (Hall
and Lieberman 2012). An imaginary demand and supply curves for motor cars in 2015 before
the increase in petrol prices are shown below-

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Quantity
Price S
S
D
D
Q*
P*
E
Figure 1: Imaginary demand and supply curve for motor cars
Source: (As created by author)
The above figure reflects that equilibrium occurs at the point E where demand curve (DD)
and supply curve (SS) intersects each other. The corresponding equilibrium price of cars is
P* and equilibrium quantity of cars is Q*.
b) The change in equilibrium price and quantity for motor cars is illustrated below-

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Quantity
Price
S
S
D1
D1
Q1
P1
E
P*
Q*
D
D
P2
E1
Q2
Figure 2: Change in equilibrium quantity and price for cars
Source: (As created by author)
The equilibrium point is ‘E’ where initial demand curve (DD) and supply curve (SS) cut
each other at which equilibrium price is P*and equilibrium quantity is Q*. Increasing
geopolitical tensions and cut in supply of petrol from OPEC and non- OPEC producers
creates upward pressure for price of oil. Rise in price of petrol reduces the demand for motor
cars. As a result, the demand curve shifts leftward from DD to D1D1. The new equilibrium
point occurs at point E1 where initial supply curve (SS) cuts new demand curve (D1D1). As a
result, the price decreases to P1 and quantity decreases to Q1. But most of the sellers were
not willing to sell the cars at price P1 and thus wanted to sell the cars at price P2 (Taussig
2013).

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Quantity
Price
S
S
D1
D1
Q1
P1
E
P*
Q*
D
D
P2
E1
Q2
2) One of the determinant that initiated change in pricing and production quantity of cars is
geopolitical risks in Middle east along with supply cuts of petrol from OPEC as well as non-
OPEC manufacturers that leads to rise in petrol price. According to ACCC (Australian
Competition and Consumer Commission) report, the motorists of Australia are slugged with
high petrol prices since the year 2015. The findings of ACCC revealed that average price in
most of the regions in Australia increased by near about 12.6%. This increase in petrol price
was the outcome of few factors such as- exchange rate, refined prices of petrol, higher crude
oil and high gross retail margins. It was evident from few facts that rising price of fuel
highlighted increasing cost plaguing Australian businesses with retailers hitting hard by cost
of rent, wages and transportation. Owing to rise in petrol prices, the demand for cars has
decreased. Owing to decrease in demand for cars, the price as well as quantity of cars
reduced. This in turn has decreased the sell of motor cars since the year 2015.
3)

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Quantity
Price
Q*
P*
S
S
S1
S1 D
D
D1
D1
P1
Market force that caused the equilibrium price and quantity for cars to change is rise in petrol
price owing to decrease in supply of petrol from OECD and non- OECD producers and
geopolitical risk. The initial equilibrium price and quantity is P* and Q*. Rise in petrol prices
makes a reduction in demand, which in turn lowers the equilibrium price from P* to P1 and
equilibrium quantity from Q* to Q1. However, the new equilibrium price is P* and
equilibrium quantity is Q* despite the fact that the quantity of cars provided is Q2. As a
result, the supply of motor cars also decreases.
Figure 4: Decrease in price of cars and quantity to remain unchanged
Source: (As created by author)
At the point when demand for motor cars decreased from DD to D1D1, the supply of cars
would need to have increased to allow equilibrium price of cars to decrease and equilibrium
quantity of cars produced to remain unchanged. The fall in price of cars from P* to P1
occurred due to rise in petrol prices that had been caused due to reduced supply of petrol
(Sloman, Norris. and Garrett 2013). Moreover, the supply of cars might increase if the sellers

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continue to sell the cars at low price. Thus, the quantity of motor cars might remain
unchanged even if its demand decreases.
Scenario Two
1)a) Price elasticity of demand for petrol signifies the sensitivity of percentage change in
quantity demanded of motor cars to the percentage change in price of motor cars. The
coefficient of elasticity mainly captures elasticity response between the two variables. The
formula is written as-
Price elasticity of demand (PED) = percentage change in demand for quantity/percentage
change in price of product
PED= change in the quantity demanded /change in price* price /quantity
The common formula for coefficient of price elasticity between the variables A and B is
shown below-
Coefficient of elasticity = percentage change in the variable B/ percentage change in the
variable A
B)
YEAR PETROL PRICE PER LITRE QUANTITY OF PETROL SOLD
2015 1.2 1,20,000
2018 1.5 1,15,000
PED=Change in quantity demanded/change in price *(P1+P2)/2/(Q1+Q2)/2
Change in quantity demanded 5,000
Change in price 0.3
(P1+P2)/2 1.35
(Q1+Q2)/2 117500
PED 0.191489362

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Quantity
Price
D
D
P0
P1
Q0 Q1
C) The price elasticity of demand for petrol is 0.19. As the value of price elasticity of demand
for petrol is less than 1, it can be said that the price elasticity of demand for petrol is inelastic
(Rios, M.C., McConnell and Brue 2013). This means that slight change in price of petrol
results in slight or no change in quantity demanded.
2) Assuming that the government of Australia has been considering taxes on petrol for
increasing revenue. In this case, the price elasticity of demand for petrol is inelastic, which
means that the certain change in quantity demanded of petrol does not change as that of its
price. The higher inelastic the price elasticity of demand, the steeper is the curve. However,
this means that the individuals purchase same amount of petrol even if its price rises (Kolmar
2017).
Figure 5: Inelastic demand for petrol
Source: (As created by Author)
From the above figure, it can be seen that the suppliers earns P0*Q0of incomes at price P0. In
any situation, the suppliers decreases the price to P1, he earns slightly higher income of
P1*Q1. However, as the suppliers decreases the price of petrol from P0 to P1, the quantity

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demanded for petrol might increase slightly by Q0 to Q1. As a result, the suppliers can attain
less profits from this product. Now, if the government increases tax on petrol, the tax revenue
will slightly increase in case of inelastic demand.
3) Two reasons behind which the price elasticity of demand for petrol could be inelastic are
described below-
a) No close substitute-this is one of the vital reason in case of petrol as there is no other
option but to purchase petrol for filling up car. However, the firm can increase car price with
decrease in its demand for petrol (Reisman 2013).
b) Lower percentage of consumers income- lower proportion of income leads to inelastic prce
elastic of demand. Thus, higher the income proportion spent on the good, higher will be its
price.
Conclusion
From the above discussion, it can be concluded that there are several factors that leads
to change in price and quantity of product. Moreover, there are few factors that impact price
elasticity of demand for a product. In addition to this, the suppliers also reviews the product
price depending on price elasticity of demand.

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References
Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage
Learning.
Kolmar, M., 2017. Principles of Microeconomics. Springer International Publishing.
Reisman, D., 2013. The Economics of Alfred Marshall (Routledge Revivals). Routledge.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.
Sloman, J., Norris, K. and Garrett, D., 2013. Principles of economics. Pearson Higher
Education AU.
Taussig, F.W., 2013. Principles of economics (Vol. 2). Cosimo, Inc..

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