Question

Question1: Has the outbreak of the coronavirus affected the demand, the supply side of the market or both if we consider the world as one country for the market of gasoline? If it affects both, in what order? (Hint Supply is first affected or demand? Think about what is happening in the city of Wuhan). What has been the impact of this issue on the price of gas? Does this matches your demand and supply response? ( Here, use either shift in demand, shift in supply or both and see the direction in the price change.)

Question2: Using chapter2, How can you describe the outbreak in term of production possibilities frontier? Why? ( Hint:Are we inside the PPF, on the PPF or outside?)

Answer 1

Answer to question 1: The coronavirus has affected the demand side of the gasoline market at the initial stage and because of the shortage in demand and the forecast of low demand, there are fears of supply side affect impact in the market.

First, the virus affected province Wuhan has show sharp reduction in the usage of gasoline as there is very less movement of people outside the house and the streets in Wuhan are deserted. The impact of the spread has resulted in the quarantine of people in many parts of China and the fear of virus has spread across the country. The impact is expected to hit the Chinese economy by more than 1% y/y in GDP and this is also expected to impact the global economy by 0.1% to 0.2%.

As it is having these severe impact on the economy, the demand for gasoline and crude oil has dropped sharply and the forecast of demand is also dropped sharply for this quarter. It is estimated that the oil demand will fall by 800,000 bpd [barrel per day]. This shortage in demand will move the demand curve to the left and hence the price of oil has fallen because of this and this can be shown as below in graph.

From the graph, it is clear that the price has come down due to the shift in the demand curve to the left side. Apart from the actual demand cut, the forecast of lower demand in the near future is also impacting the oil prices and it has also impacted the price of gasoline.

2. Production Possibilities Frontier [PPF] - The PPF shows all possible combinations of two products using all available resources. If the resources are not fully utilized, the items are considered inside the PPF line and if not attainable, it will be outside the PPF line, while the PPF line is drawn when the resources are efficiently utilized. As in this example, the gasoline resources are not efficiently utilized due to the outbreak of coronavirus, it is expected to be inside the PPF.