Demand and suppy Essay Example | Topics and Well Written Essays - 1000 words

Demand and suppy - Essay Example With regard to the case assignment reading i.e. "What is Driving Oil Prices?" by Richard G. Anderson and Jason J. Buol, it is observed that in the period of August 2004, according to the observation of the International Energy Agency, global oil demand had been rising faster in comparison with any other phase in the previous 16 years. A key reason behind such hike in demand is the quick economic expansion of a number of nations in particular China. Moreover, China had accounted for around 40% of the demand growth regarding global oil production in the period of early 2000s and this demand had been expected to augment rapidly. With regard to supply, it can be said that issues such as political conflicts in nations like Iraq and Venezuela have had a major effect on the fluctuation of oil prices. Contextually, as per the assessment made, it is determined that factors such as enhanced speculation can be a major aspect in affecting oil prices (Anderson and Buol, "What is Driving Oil Price s?"). Both the demand & supply of oil are comparatively inflexible in the short run period. Changes in price have modest impact on either the ‘quantity supplied’ or the ‘quantity demanded’. ... Meanwhile as the quantities demanded as well as supplied change very less as the prices rise & fall, both the curves are reasonably vertical as shown below: Figure 1: Elasticity and Prices Source: (Stonebraker, â€Å"Demand and Supply Applied: Oil Prices†) Due to the reason that quantities are reasonably fixed in the short run period, any alteration in supply or demand will bring about considerable extent of changes in price. For example, if it is assumed that supply has fallen, the reduced supply generates a short-term shortage that will begin to boost price. If demand is elastic, only a small hike in price will be needed to get consumers to cut their purchases to as much as necessary in order to meet the new lowered output. Nonetheless, in the oil industry if demand is inelastic, it will assume a much greater price escalation to create the required reduction in quantity necessitated (Stonebraker, â€Å"Demand and Supply Applied: Oil Prices†). 2a. EXPLAIN WHAT HAPPENS TO QUANTITY OF OIL DEMANDED WHEN THE PRICE OF OIL DECREASES, ASSUMING THAT THE SUPPLY DOESN’T CHANGE. Quantity demanded generally refers to a definite amount that will be demanded each unit of related time at a specific price, if other aspects remain fixed. Market equilibrium is a condition where demand and supply for a certain product matches. The price and quantity only remains fixed at the point of interaction of the demand and supply curve. In accordance with the question, it can be stated that if the price of oil falls then the quantity of oil demanded will definitely surge as oil is a price sensitive product and its demand stands always higher. In terms of movement of curve, it can be said that the curve will shift to the right. The effect of the above