QUESTION 1 Ceteris paribus, assume a global shortage of petrol has resulted in a doubling of petrol prices. Use graphical demand and supply analysis to support your explanation of the impact on...

VICTORIA UNIVERSITY OF TECHNOLOGY, FOOTSCRAY CAMPUS
BEO1105
ASSIGNMENT (20%)
SEMESTER 1, 2017
Total = 25 marks. Marks will be converted to 20 per cent.
QUESTION 1
Ceteris paribus, assume a global shortage of petrol has resulted in a doubling of petrol prices. Use graphical demand and supply analysis to support your explanation of the impact on equili
ium price and quantity in the market for:
a) Low fuel efficient petrol cars.
In case of doubling of petrol prices due to shortage of petrol at global scale, there will be fall in demand for low fuel efficient cars. This is because these cars will give less mileage per litre of petrol consumed. As a result, people would not purchase such cars which will reduce its demand in the market. Therefore, the demand curve for such cars will shift towards left leading to fall in its equili
ium price as well as equili
ium quantity.
Figure 1 – Diagram showing fall in demand of cars
In the above diagram, there is leftward shift of the the demand curve with no change in supply curve leading to fall down in equili
ium price and quantity in the market. Initial price is P and initial quantity is Q1, after change in demand, the new equili
ium price is P1 and the new equili
ium quantity is Q1 with new equili
ium point at E1.
) Cars that use liquid gas (a substitute for petrol), where the price has not increased.
When there will be rise in prices of petrol, the demand for cars using substitute goods will rise. It would become cheaper for the consumers to use such cars that use liquid gas rather than petrol for which there is no change in the price. As a result, the demand curve for such type of cars will increase leading to rightward shift and thereby the equili
ium price and quantity for such cars will increase in the market.
Figure 2 – Diagram showing rise in demand for cars
In the above diagram, the initial equili
ium point is at E with initial price at P and initial quantity at Q. After rise in demand for cars, the new demand curve becomes DD1 and new equili
ium price is at P1 and new equili
ium quantity is at Q1with E1 as the new equili
ium point.
2 + 2 = 4 Marks
NOTE: In your answers explain the market equili
ium adjustment process
QUESTION 2
Use graphical demand and supply analysis to support your explanation of the effect the following events will have on the market for beef. (Assume ceteris paribus for each of the event).
a) A sharp fall in average wages, assuming beef is a normal good.
Fall in average wage rates will reduce the cost of production of beef which in turn will increase the supply of beef in the market as producers will have better profit margin at lower cost of labour. It...