The Middle East acts as the largest oil producer. In fact, most of the world’s largest economies depend solely on the region for the given product (Federal Trade commission, 2011). In the event of political unrest, the oil supply would be greatly compromised leading to a fall in the same and consequently, the demand for the commodity would go up. As the law of demand states, this would lead to an increase in the price of oil. This would affect the equilibrium level of oil demand translating to consumers paying more for less of the quantity.
This scenario would have very severe implications on consumers in terms of energy utilization (Mind Tools, 2011). Oil being a raw material for gasoline would lead to a proportionate cost enhancement in the value of gasoline. The price increases would largely be shifted to the consumers. Note that, the increase would also lead to a similar increase on other economic goods that depend on the same for production.
Demand refers to the amount of a given commodity that consumers are willing to purchase at a particular price in a specific period. Supply on the other hand is the amount of a given product that the suppliers are willing to produce and avail in the market for a certain price in a specific period. The equilibrium level of demand and supply is the point at which the demand curve and the supply curve meet in schedule. This curve is used to determine the market price and level of a commodity as shown in the Fig. 1 below. A modification of supply levels always results in a change in the price of a commodity and consequently changes in the demand of the same.
These changes are influenced by, changes in production cost, improved technology, industrial growth, political stability amongst others (Federal Trade commission, 2011). The shift in supply changes the equilibrium price. Due to the high rate of fuel consumption by luxury cars, consumers may opt to purchase low consumption cars shifting the demand downwards for the luxury vehicles. This would lead to a reduction in prices for the luxury cars in respect to the law of demand. The equilibrium price of the luxury cars will drop in accordance to the quantity demanded the supply levels would also drop due to low prices.
Rise in fuel prices would prompt consumers to move alternatively to low consumption cars thus shifting the demand in favor of economy cars. This would attract high prices for the economy vehicles as enhanced demand is noted in respect to pricing laws. The supply of the same would be expected to rise as a result and thus shifting the initial equilibrium upwards.
Supply and demand curve for gasoline:
Supply and demand curve for luxury:
Supply and demand curve for economic cars:
Mind Tools. Supply and Demand Curves: Understanding Price and Quantity in the Marketplace. 2011. Web. 11 Oct 2011.
Federal Trade commission. Gasoline Price Changes: The Dynamics of Supply, Demand, and Competition. 2011. Web. 11 Oct 2011.