Case Study Analysis on Economic Principles ECO10001

This case study analysis discusses the equilibrium price and quantity of cars on the market before and after the change in the price of petrol. It also covers the price elasticity of demand for petrol and the reasons for its inelastic nature.

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CASE STUDY ANALYSIS
ECONOMIC PRINCIPLES ECO10001

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Table of contents
Scenario 1...................................................................................................................................3
Scenario 2...................................................................................................................................5
Reference....................................................................................................................................8

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Scenario 1
Task 1
1. a The initial equilibrium
Figure 1: The petrol market in the year 2015
(Source: Developed by the learner)
The above figure shows the equilibrium price and quantity of cars on the market before the
change in the price of petrol.
b. The changed equilibrium

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Figure 2: The change in the demand for the car due to the increase in petrol prices
between the year 2015 - 2018
(Source: )
2.
The demand curve for the cars is the relevant curve that initiates the changes in the car
market. The demand for the car is not only related to the price of cars but also with other
factors like the price of oil.
3.
The petrol and the cars are complementary to each other as cars will only run only if it is
used with petrol. Now as per the reports, the price of petrol is rising in the recent few years.
The increased price of petrol will reduce the demand for the cars between the years 2015 to
2018. The producers will not get affected directly due to the changes in the price of petrol and
hence the supply curve will remain the same (Olsen, 2017). Consequently, the price of cars
will go down to $4200 to $4500 and the quantity of car sold in the equilibrium will go down
to 40 cars from 50 cars.

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4. The unchanged equilibrium quantity
Figure 3: The change in the supply of cars
(Source: Developed by the learner)
In order to keep the equilibrium number of cars unchanged despite the reduction in the price
of cars, the supply for the cars needs to have changed (Mankiw, 2015). If the producers of
cars supply more cars in every price points the supply curve will shift rightward and hence
the equilibrium quantity sold will remain the same.
Scenario 2
1.a
The price elasticity of demand for petrol means the responsiveness of the quantity demanded
of petrol corresponding to the changes in the price of petrol (Sahlins, 2017).
Price elasticity of demand for petrol= (percentage changes in the quantity demand/
percentage changes in the price)
1.b

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From the data, increases by 25% and the demand reduces by 4%
Therefore, the price elasticity of demand for petrol is,
= -4% / +25%= -0.16
1.c
The price elasticity of demand for petrol is inelastic in nature as the absolute value of the
elasticity is less than 1.
2.
Figure: increase in the tax on petrol
(Source: Developed by the learner)
2.
The elasticity of demand for petrol is inelastic and hence increases in price due to increase in
tax on petrol will result in a proportionately less reduction in demand compared to the
increased price. The red line shown in the diagram is the initial tax rate and the corresponding

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rectangle shows the tax revenue. The increased tax rate has been shown with the help of blue
line. Comparing the rectangles it can be seen that tax revenue will increase with the increase
in tax (Bober, 2016).
3. Two reasons for the inelastic price elasticity of demand for petrol
 Petrol run car cannot use any other fuel and hence, despite the increase in the price of
petrol most of the consumer will still demand it.
 If the price of petrol is very low compared to the incomes of the consumer, the change
in the price of petrol will not influence the demand much and hence it will be
inelastic.

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Reference
Bober, S., 2016. Alternative principles of economics. Routledge.
Mankiw, N.G., 2015. Ten principles of economics. Principles of Economics, pp.3-18.
Olsen, J.A., 2017. Principles in health economics and policy. Oxford University Press.
Sahlins, M., 2017. Stone age economics. Routledge.