Question

The following news was printed in the Economic Times:
"Petrol and diesel prices were cut by Rupees 2 per litre each as international oil prices slumped to a five-year low."
Use a diagram and economic theory to analyse the impact on the demand for cars in India.

Answer 1

When the prices of petrol and diesel are cut, the demand for cars is expected to rise, because car and petrol are complementary goods. It implies that demand curve for cars will shift to the right. More cars are demanded at their existing price. The figure illustrates this situation. Initially, PK cars were purchased. As price of petrol and diesel decreases, PS cars are purchased even when price of cars is constant. Accordingly, the demand curve for cars shifts forward from $D$ to $D_1$.