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

Start by identifying what the question asks: the likely impact on current demand for petrol (gasoline) given news that its price is expected to rise next week.
Option a: Increase. If people expect prices to be higher in the near future, they often buy more now to stock up before the price goes up. This creates a rightward shift in the demand curve, reflecting an increase in quantity demanded at current prices due to the anticipation of higher future costs.
Option b: Decrease. A fall in current demand would require a reason such as an anticipated price drop or a strong substitution effect away from petrol. Since the news points to higher prices ahead, this reasoning doesn’t fit the anticipation effect and would be misleading.
Option c: Contraction. In microeconomics, a contraction refers to a decrease in quantity demanded along the same demand curve due to a higher price. Here we’re considering a change in demand (shift), not movement along the curve, and the trigger is an expected price rise, not a current price rise.
Option d: Expansion. An expansion means an increase in quantity demanded along the same curve due to a lower price, or a shift to a greater quantity at all prices. The scenario describes an expected price increase, which would not cause an expansion along the existing demand schedule.

Putting it together, the anticipation of higher future prices typically motivates buyers to purchase more now, increasing current demand for petrol. The other options mischaracterize the effect (either as a decrease, or as a movement along the curve rather than a shift in demand) given the stated expectation of a price rise.

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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