Question

7. In the gasoline industry, the fracking revolution reduced the cost (both marginal cost and average cost) of obtaining oil from underground deposits that had previously been inaccessible in practice. How did this affect the supply curve of gasoline? Treating the US gasoline market as competitive, how did this change by itself affect the market equilibrium? How did this affect aggregate consumer's plus producer's surplus in the oil market?

Answer 1

If there is reduction in cost of extracting through fracking revolution, producers would be reluctant to extract more oil to earn more profit. It will shift the supply curve to its right from supply to new supply while demand curve remains the same reducing the price from P to P1 and output rises from Y to Y1.

Initial consumer surplus is area of triangle ABP while producer surplus is PBC.

New consumer surplus is area of triangle ADP₁ while producer surplus is DEP₁.

In total we can see from the size of triangle that there is rise in consumer and producer surplus in the market.

New Supply