DQ 3: Microeconomics

The following excerpt is from ABC News, 21 April 2020, regarding the impact of COVID on oil prices at the time: "Globally, oil prices have been crashing for weeks as COVID-19 disrupts international travel, which means airlines are using very little fuel; as well as car travel, meaning most households are using less fuel; and also industrial output, much of which uses fuel, oil or petrochemicals."

a) Draw and explain a simple diagram that shows why oil prices fell. Your diagram and explanation does not have to show oil prices becoming negative, but it should explain falling oil prices.

b) Oil is used in the production of petrol. Draw and explain a simple diagram that explains the likely effect of oil price shocks and other COVID related shocks on unleaded petrol prices in Australia.

c) What would be the likely effect of oil price shocks and other COVID related shocks on unleaded petrol prices at a service station in Hawthorn? How would this affect profitability of the firm? Illustrate in an appropriate diagram, using the appropriate market structure.

d) Explain the diagram in part

c), explaining the price and quantity decisions of the firm.

e) Is your analysis consistent with data on petrol prices? Present some data. Given the time constraints, it is not necessary to create charts etc, but you can use data to quantify some of the variables from your analysis above.