a)The rate in the 2nd quarter in 2016. Due


a)The graph for petrol is
quite volatile but key events that stand out are the recession that occurred in
2008-2009. During this period of time the financial crisis had a negative
effect on the petrol sector as prices decreased. During the recession there was
tight credit so banks didn’t want to loan out money to companies which resulted
in many producers paying high interest rates when raising capital which
furthermore affects a company’s future earnings explaining why during this
period of time petrol prices were at their lowest. Demand for petrol is quite
inelastic due to the lack of alternatives to buying petrol hence why increasing
the price of petrol will have no significant effect on the quantity demand for




Before the recession started prices in the UK
rose consistently hitting over £1.20 per litre in 2008. In addition another
decline is seen in 2016 which is due to the weaker pound following the Brexit
referendum results in the 3rd quarter of 2016. The rise in petrol
prices were responsible for the pressure on the inflation  rate in the 2nd quarter in 2016.
Due to weaker pound there as been an increase in petrol prices as a weak pound
makes imports dearer.

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Increase in petrol price can be explained due
to it being a non-renewable resource therefore there is only a limited quantity
supplied in comparison to the high demand. The scarcity principle suggest that
the price of petrol should rise until it reaches an equilibrium level is
achieved between supply and demand but this would restrict and exclude
individuals as not everyone will be able to afford it.

Decreases in prices can be explained due to
the introduction of substitutes e.g. hydrogen powered cars , possible
subsidisation occurring by government due to negative externalities of
consumption of petrol could make renewable resources preferable for consumers
due to lower prices . as result there is a fall in demand for the petrol
leading to less demand however this depends on the cross elasticity of demand.













In addition before the UK recession, prices
of oil increased which was due to a supply shock caused by Iraq which was one
of the top exporting countries. The war in Iraq caused a supply shock  as UK Petrol Prices increased from 105.2p in
03/03/08 to 117.7p in 16/06/08 this increase in price was due to the decrease
in supply of oil from one of the world’s top exporters. Crude oil Is seen as
very vulnerable to negative supply shocks due to the location of most of the
world’s supply. When output decreases the price of the commodity increases due
to a shift in the supply curve to the left.

b) Increase in the price of petrol will have no direct effect
on the quantity demanded for diesel as you can’t just put diesel in petrol cars
however it does have an effect on the quantity demanded on diesel run cars as
consumers see a diesel car maintenance costs cheaper in relation to diesel run
cars. Therefore an increase in the price of petrol has a secondary effect on
those looking to purchase diesel run cars. This is also due to short term
variables as not all consumers might be able to change between petrol run cars
and diesel run cars in the short term but may be able to do so in the long run.

Increase in price of petrol leads to a decreases in demand for
petrol run cars due to  the maintenance cost of a car increasing. A
sensible consumer will look at the long term perspective of buying a petrol car
and the increase in petrol prices leading to a consumer switching to purchase a
diesel powered cards, or simply delay the decision to buy a new car or the
consumer could look for an alternative method of transports e.g. motorcycles.
This is because cars and petrol are complementary goods, so Following
the Law of Demand, when price of petrol rises, its demand falls. But since
petrol is always used with cars, a fall in demand of petrol implies a fall in
demand for cars.

c) Demand is more elastic in the long run compared to in the
short run as when prices change there’s a slight time lag as consumers need to
respond and change their buying habits.in addition petrol is price elastic due
to the effect of a cut in oil exportation from western countries will lead to a
rapid increase in petrol prices. On the other hand in the short run the demand
for petrol may be inelastic due to time lag as some consumers need to notice
and then respond to the price change. When the price of fuel increases, the
quantity demanded of fuel only decreases slightly in the first few months as
only few people could reduce the consumption of petrol, this demonstrates that
the demand for fuel is very inelastic in the short run.



Consumer theory shows how people decide to spend their money,
given what they prefer and budget constraints.

By having a household’s budget squeezed through no out of work
benefits, this leads to consumers having less money to spend therefore the
budget constraint increases as a consumer is more limited in consumption due to
a decrease in their budget. By increasing prices of food, housing and energy
less can spent in other areas. In this case the price of food increases, food
is regarded as a necessity therefore due to this if the price of food increases
the quantity demanded falls less than proportionately. Therefore as the
household budget squeezes those on lower income levels are affected more
compared to those in higher income levels. Therefore this theory mainly applies
to those on lower incomes whereas those on higher incomes may still consume the
same quantity of food due to the effect being lower on those with higher
incomes. This theory also applies to energy as its regard as a necessity.
However for the service of buying a house that is regarded as a normal good
therefore as the price of housing increases the quantity demanded fall, this
especially affects those on lower incomes as they no longer have the ability to
purchase a house due to an increase in budget restrictions, however those on
higher incomes could possibly afford to buy a house regardless of the increase
in price due to the higher incomes which allow them to absorb the increase in
prices better than those on lower incomes. Due to this those on lower incomes
may react on consuming a differencing housing service, such as rent because as
house price increases they will need to switch to an alternative as to have a
house in necessary therefore as the price of rent follows and increase the
price of buying a house the quantity demanded falls less than proportionately.

When the prices of goods increased this leads to a change in
the consumers discretionary income. The income effect is shown because as
prices of a normal good increases, in this case food  the consumer experiences a decrease in income
which leads to a decrease in demand for food. In addition the income effect can
affect more than one good even if they are unrelated therefore an increase in
price of food also leads to a decrease in demand for another good. However food
is regarded as a necessity therefore the quantity demanded will not decrease by
much as food is needed to survive therefore consumers might switch to inferior
goods, e.g. switching from Kingsmill bread to cheap inferior white bread. This
shows the substitution effect as the good’s relative price increases leading to
the consumer demanding less of the good. This aspect is also represent in
housing as those on lower incomes substitute buying a house to renting one due
to their restricted budget when housing prices increase. However for those on
higher incomes the substitution effect may not take place because the increase
in price only have a proportionate effect on their budget.

The change
of relative prices is the substitution effect (steep line to dotted line) and
the change of purchasing power is the income effect (dotted line to parallel
solid line)






House and energy are composite goods therefore If house
prices increase those on lower incomes may be able to cope with this by
reducing the amount spent on food , so they can reduce the quality of food they
consume or quantity to allow them to pay for the increase rent payments.
However those on higher incomes will react differently as they will able to
absorb the shocks of increased in house prices therefore  they will not need to decrease the amount
spent on food to finance for the higher house rent. Substitution effect could
occur for those on lower incomes as they attempt to switch between energy
providers in order to save money. However tacit collusion occurs between energy
firms therefore by attempting to change energy providers those on lower incomes
wont find anything that will exponentially decrease the amount spent on energy.


The effect of the spread of computers is seen as a capital
investment into a company which leads to a more productive labour making the new
isoquant curve steeper, due to this change in the slope it needs more labour to
substitute for one unit of capital compared to before. This allows it to move to
a point where there is more computers and less labour. Production theory and
the diagram show that most firms wish to profit maximise where MC=MR. As there
is capacity constraint in the short run this forces firms to have fixed total
output and due to this the firms revenue is fixed as they are price takers,
therefore the only way they are able to maximise profits is through reducing
costs e.g. through reducing costs of production. The long run production
function of a firm shows the usage of capital and labour which is demonstrated
by the isoquant also in the long run inputs can be varied  therefore capital investment can be added by
using a constant technique of production allowing labour to become more
efficient through technological advancements created by capital investment,
therefore in a iso-quant curve there are two factors of production for a
commodity in this case, labour and capital which produce only one product. In
addition the diagram shows that substitution can occur between labour and
capital however the marginal rate of technical substitution between capital and
labour would be diminishing as one variable input increases efficiency can also
be achieved by using labour and capital with maximum efficiency. The iso-cost
lines on the diagram shows what the firm wants to produce and the alternative
combinations of factors that can be purchased with a fixed amount of money
therefore it shows what an increase capital will do to the production process.
Whereas in the isoquant line a producer will be able to determine the
technically efficient ways of combining factors of production, capital and
labour to increase the production process and produce a fixed level of output.

Over time
computers have become cheaper therefore more firms are able to employ more capital
for a cheaper. The decrease in relative costs of computer devices hinges the iscocost
given the workers employed stayed the same. This leads to a company which will have
more computers, potentially more labour or less and a higher output. This will require
skilled workers to operate the cheaper computers , given workers for skilled labour
increases as skilled labour is being used.  This moves the firm to a point where there is more
computers, less labour and where the same output is produced.