Fuel Prices Meet Automation
The question
New gasoline-powered cars and the fuel they burn are complements. The market for new gasoline-powered cars in the country of Ostreth is initially in equilibrium when a conflict among oil-exporting nations drives the pump price of gasoline far above its usual level. In the same quarter, and for unrelated reasons, Ostreth's carmakers finish switching their plants over to a robotic assembly system that cuts the labor cost of building each car. Assume the carmakers' other production costs, including the energy they use, are unchanged. Show the effect of these two changes on the market for new gasoline-powered cars in Ostreth. Show the effect on the Supply and Demand graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Fuel Prices Meet Automation: the worked answer
On the Supply and Demand graph, Demand shifts left and Supply shifts right.
Why Demand shifts left and Supply shifts right
Gasoline and gasoline-powered cars are complements, so a much higher pump price makes owning one of these cars more expensive to run and buyers want fewer of them at every car price, which shifts the demand curve left. The robotic assembly system lowers the labor cost of building each car, and a fall in per-unit production cost shifts the supply curve right. Both shifts push the equilibrium price in the same direction, so the price of new cars definitely falls. The two shifts pull quantity in opposite directions: the decrease in demand on its own would reduce the quantity traded, while the increase in supply on its own would raise it. The change in equilibrium quantity is therefore indeterminate, and which way it goes depends on which shift is larger.
What happens to the equilibrium
The equilibrium price of new gasoline-powered cars definitely falls, while the change in equilibrium quantity is indeterminate because it depends on which of the two shifts is larger.
The mistake students make on this one
The standard wrong answer is "price falls and quantity rises," copied straight from the one-shift technology question students have drilled a dozen times. Here the demand shift is subtracting from quantity at the same moment the supply shift is adding to it, and because the stem never ranks the two shifts, quantity has no determinate direction. A second frequent error is shifting supply left because expensive gasoline sounds like a cost of production; the fuel is bought by drivers, not by the carmakers, so it reaches this graph only through buyers.
On exam day
Before writing a single sentence, ask which one variable both events push the same way: here both push price down, so price is what you commit to and quantity is what you label indeterminate and tie to the relative sizes of the shifts.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Demand shifts left and Supply shifts right and every other curve on the Supply and Demand graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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