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An Economics Question

Increase in discovery of raw materials leads to fall of cost of production, leads to increase in supply of petrol.

Please explain why increase in discovery of raw materials leads to fall of cost of production.

Thank you

Answer

To produce petrol, you will have certain costs of production. You may view the raw materials as the costs of production for petrol, in this case it should be crude oil (which will be refined into petroleum products), which has can be viewed with its own demand and supply dynamics.

Besides raw materials, you have other costs of production such as maintenance of equipment, electricity, transport, etc. However, in the case you mentioned above, we are looking specifically at raw materials as one part of the costs of production for producing petrol.

As such, when there’s an increase in the discovery of raw materials, the supply of raw materials increases, hence, ceteris paribus, the price of raw materials drops.

As the price of raw materials drops, this leads to the drop in costs of production.

I hope this answers your question, otherwise feel free to clarify if necessary.

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Thank you 

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