1. Suppose there is suddenly a sharp rise in oil prices.

This has occurred because of

reduced cartel supply and booming demand, but it might also come about because of
the effect of Covid-19. Explain the results of the interaction of supply and demand in oil
markets.
Answer: In the above situation, the oil price has a sharp rise because of the supply shortage
and high demand. In general sense of economics, if the supply of a product is low, it is
common scenario that the price of that product will go up high. Here, the price of a necessity
item like oil rose as a result of low supply and high demand.
There will be low price elasticity of demand in the oil market. That means demand for oil is
not very responsive to changes in prices. For example, if someone has a car and usually
drives to work and other places, he will not be bothered of the price hike of oil.
In the long run, businesses and consumers can adapt to changing oil prices. In the current
Covid-19 situation, the people might get adapted with the motion.
The low price elasticity of demand for oil is quite different from the demand for other goods
and services, even other types of energy. For example, higher price of oil can lead to more
use of other fuels like solar, electricity etc.
Supply is less responsive to price changes than demand. However, the supply of oil is fairly
inelastic, even by the standards of supply curves.

2. “Changes in disposable income lead to movements along with the consumption

function; changes in wealth or other factors lead to a shift of the consumption function.”
-Justify.
Answer: The consumption function is an economic formula that represents the functional
relationship between total consumption and gross national income. British economist John
Maynard Keynes, introduced this concept.
Calculating the Consumption Function
The consumption function is represented as:
C = A + MD
Where:
C=consumer spending
A=autonomous consumption
M=marginal propensity to consume
D=real disposable income
Disposable income, also known as disposable personal income (DPI), is the amount of money
that an individual or household has to spend or save after income taxes have been deducted.
When disposable income increases, people either save more or spend more, which leads to a
growth in consumption.
The factors that affect consumption function are: income, wealth, expectations about the
level and riskiness of future income or wealth, interest rates, age, education, and family size.
Wealth is increased if income increases or stock and bond price increases. Wealthier people
tend to spend more. An increase in real wealth shifts the consumption function upward, a
reduction in real wealth shifts it downward.
From the formula of consumption function, it can be stated that, if any of the components
such as, A (autonomous consumption), M (marginal propensity to consume) or D (real
disposable income) is changed, the consumption function response simultaneously. If only
disposable income is changed, it will move inside the consumption function. But if the other
components changes, the consumption function will either shift upward or downward.