ECONOMICS OF AUTOMOBILE INDUSTRY QUESTION ANSWER 2022

Running head: ECONOMICS
Economics
Name of the Student:
Name of the University:
Author note:

1
ECONOMICS
S1
S2
D
P1
P2
Q1Q2
P1
P2
Q1Q2 Quantity
demanded for
passenger cars
Supply of petrol
D
Price of passenger
cars
Price of
petrol
ANSWER 1 (a)
Australia is heavily dependent on the Middle East for the petroleum. It imports almost all
of its oil majorly from Asia, Africa and the Middle East while exports almost the entire oil
production mainly to Singapore and Indonesia (Richardson 2018). The imports of petrol are high
as Australia’s domestic production has been declining. However, as hostilities break out in the
Middle East, the production as well as supply of petroleum or crude oil faces disruption and
creates uncertainty regarding the export supply across the world (Jaffe and Elass 2015). It raises
the price of the crude oil and hence, imports of oil from the Middle East become costlier in the
countries like Australia that imports a large amount of oil.
As oil is the complementary good for the automobiles, hence, price of oil affects the
demand for passenger cars as per the cross price elasticity of demand. The large passenger cars,
such as, the SUVs consume greater amount of petrol. Thus, a rise in the petrol prices reduces the
demand for these cars.
Figure 1: Impact of changes in petrol price and launch of electric cars in Australia

2
ECONOMICS
From the above figure, it can be seen that due to shocks in the Middle East the supply of
oil reduces and that shifts the supply curve inward. It increases the price from P1 to P2 in the
export market of Australia. As oil is complementary to passenger cars, rise in oil price reduces
the demand for the cars from Q1 to Q2 that run on petrol.
ANSWER 1 (b)
The electric car is a substitute product for the passenger cars that run on petrol. As stated
by Pindyck and Rubinfeld (2015), a substitute product is that good which is used to serve the
same purpose similar to another good in the market. The consumers want less amount of a
product if they consume more of the other product. Thus, the demand for substitute products
shows a negative correlation. Hence, it can be said that as electric car is a differentiated product
under the automobile industry, it works as a substitute product for other types of cars. On the
other hand, as per the law of demand, when the price of a commodity falls, the demand for the
commodity rises, other things remaining same (Cowell 2018). Hence, if the electric cars are
launched at an affordable price in the Australian market, the demand for those cars will be higher
due to the reason that the price of petrol is going up, and hence the demand for passenger cars is
going down. Therefore, higher demand for the electric cars will lead to lower demand for the
passenger cars that run on petrol.
ANSWER 2 (a)
The production possibility frontier (PPF) represents a curve that illustrates different
combinations of production of two different goods with given resources and technologies
(Kokkinou 2017). In other words, the PPF curve shows all the possible combinations of outputs
of two different foods, which can be produced with the given amount of resources as well as
technologies (Mert 2018). Thus, as stated in the given problem that the workforce of Australia is
encouraged by the government to study further to enhance their skills before entering the
workforce, this is reducing the quantity of the available workforce at present and that is
decreasing the total output of the nation.