The market for gasoline has changed in a couple significant ways over the last few years: new technologies have decreased the costs associated with producing gasoline, and automobiles are becoming more fuel efficient. Describe how these changes affect the supply of and demand for gasoline. What is the overall effect on equilibrium price?

Supply will shift to the right because of a decrease in cost of production and demand will shift to the right because of a fall in demand due to increased efficiency. The price is bound to fall but the change in quantity is ambiguous, i.e it may fall or it may rise.

A decrease in the cost of production of gasoline improves the profitability of the gasoline processors, thus inducing them to supply more and more in order to earn higher profits. This inducement to earn more profits leads to a rightward shift in the market supply curve, i.e it shifts to the right. Whereas, an increase in efficiency will lead to a lower demand for fuel in the market. This will cause a leftward shift in the demand curve at each level of price. Therefore, the overall effect will be a reduction in price and an ambiguous change in quantity. The quantity can fall as well as rise depending on the degree of shift in the curves.

In the figure shown, DD and SS are the initial demand and supply curves respectively. An improvement in technology for processing of fuel led to an increase in supply to SS1 whereas an increase in efficiency of automobiles led to a decrease in demand for fuel leading to a leftward shift to DD1. The new equilibrium occurs at point e1 with price P1 and quantity Q1. Note that quantity could have increased also and it completely depends on the magnitude of the shift.