Imagine that the news reports that, due to global factors, the price of petrol (fuel) is likely to increase substantially next week. What impact is this likely to have on demand for petrol now?

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BlackTom AI · Accepted Answer

The scenario presents a is a question about how anticipated future prices influence current demand for petrol.
Option a: Expansion. In economics, expansion refers to an increase in quantity demanded along the existing demand curve due to a lower price, not a reaction to an anticipated price increase. Since the price is expected to rise, this option mislabels the effect and contradicts the given context.
Option b: Decrease. If consumers expect prices to be higher tomorrow, some might delay purchases, but typically the expectation of higher prices today encourages more buying now to avoid paying more later. Therefore, a simple decrease in current demand is not the most accurate description under the standard expectation effect.
Option c: Increase. When people anticipate a substantial price rise next week, they often buy more petrol now to lock in the lower current price, or at least to stock up. This causes current demand to rise, either through a larger quantity demanded at the current price or a shift in buying behavior in the short run. This option best captures the intuition about price expectations influencing today’s demand.
Option d: Contraction. Contraction means a decrease in quantity demanded due to higher price, which would be true if the price itself rose today, but the scenario specifies a future rise in price. The question asks about the impact on demand now, and contraction does not align with consumers’ likely response to anticipated higher prices.
Thus, the reasoning supports that the most plausible immediate effect on current demand is an increase, driven by the expectation of higher prices in the near future.

Imagine that the news reports that, due to global factors, the price of petrol (fuel) is likely to increase substantially next week. What impact is this likely to have on demand for petrol now?

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