In an economy where heating oil is the primary source of heat for new households, new supplies of natural gas, a substitute for heating oil, are discovered. Natural gas provides heat at a much lower cost. What is the most likely effect of these discoveries on the market price and quantity of heating oil produced?

Question

In an economy where heating oil is the primary source of heat for new households, new supplies of natural gas, a substitute for heating oil, are discovered. Natural gas provides heat at a much lower cost. What is the most likely effect of these discoveries on the market price and quantity of heating oil produced?

Question 2 options:

price will decrease; quantity will decrease

price will decrease; quantity will increase

price will increase; quantity will decrease

no change in price; no change in quantity

Answer 1

The most likely effect of the discovery of new supplies of natural gas, a substitute for heating oil, is that the market price of heating oil will decrease and the quantity produced will also decrease. As natural gas provides heat at a much lower cost, consumers are likely to switch from heating oil to natural gas. This decrease in demand for heating oil will lead to a decrease in its market price. Additionally, as the demand for heating oil decreases, producers will likely scale back their production, resulting in a decrease in the quantity of heating oil produced.