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?

Question

BlackTom AI · Accepted Answer

The prompt presents a scenario where news reports a likely substantial increase in petrol prices next week due to global factors, and asks about the impact on current demand for petrol.
First, recall the basic idea: when buyers expect prices to rise in the near future, they often try to purchase more now to avoid paying higher prices later. This is driven by price expectations influencing current purchasing behavior rather than shifting the long-run demand curve.
In this context, if people believe petrol will be much more expensive next week, they are incentivized to buy more petrol today. That behavior increases the quantity demanded in the present period as households and firms stock up before the price hike is in place. It is a classic example of a temporary boost in current demand caused by anticipated price increases.
However, there are nuances worth noting. If the price increase is expected to be permanent or if buyers face storage or liquidity constraints, the magnitude of the immediate uptick may be smaller. Additionally, some users might cut back if they anticipate even higher future costs or integrate conservation efforts, which could dampen demand. Yet the dominant, standard reaction described in many models is an upward push in current demand as buyers pull future purchases forward in time.
Given the stated answer option is 'Increase,' the reasoning aligns with the expectation-driven demand effect: current demand rises as buyers anticipate higher future prices and adjust their purchasing timing accordingly.

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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