Coursework in Economics - Essay Example

Section I) Market equilibrium price and quantity Market equilibrium price and quantity is the price and quantity where the market demand is equalto market supply, (Hardwick (2002)). The following table is an example quantity demanded and quantity supplied at different prices: price quantity demanded quantity supplied 1 28 12 2 26 14 3 24 16 4 22 18 5 20 20 6 18 22 7 16 24 8 14 26 9 12 28 10 10 30 From the above table it is evident that at price 5, the quantity demand is equal to the quantity supplied, this means that the equilibrium price is 5, equilibrium quantity is 20. The following diagram shows the supply and demand curve for the good: Therefore the equilibrium price and equilibrium quantity is the price and quantity where the supply and demand curve intersects. (ii) A shift in demand A shift in demand curve occurs when the quantity demanded increases or decreases given that the price remains constant, the demand curve may shift upwards or downward, some of the reasons why the demand curve shifts include a change in future price expectations, consumers may opt to purchase more today to avoid high prices in the future or purchase less to purchase at low prices in the future, (Hardwick (2002)). The following table shows an example of downward shift and upward shift in demand: price Original quantity demanded upward shift downward shift 1 28 30 26 2 26 28 24 3 24 26 22 4 22 24 20 5 20 22 18 6 18 20 16 7 16 18 14 8 14 16 12 9 12 14 10 10 10 12 8 The following diagram shows a downward and upward shift in demand curve: From the above diagram assuming that demand curve 0 is the original demand curve, a downward shift in the demand curve will shift the demand curve to demand curve 1 while an upward shift will shift the demand curve to demand curve 2. (iii) A shift in supply A shift in supply curve occurs when the quantity supplied increases or decreases given that the price remains constant, the supply curve may shift upwards or downward, (Hardwick (2002)). The following table shows a downward and upward shift in supply: price Original quantity supplied upward shift downward shift 1 12 14 10 2 14 16 12 3 16 18 14 4 18 20 16 5 20 22 18 6 22 24 20 7 24 26 22 8 26 28 24 9 28 30 26 10 30 32 28 The following diagram shows a downward and upward shift in supply curve: From the above diagram assuming that supply curve 0 is the original demand curve, a downward shift in the supply curve will shift the supply curve to supply curve 2 while an upward shift will shift the supply curve to supply curve 1. (iv)Own price elasticity of demand Own price elasticity of demand refers to the percentage change in quantity demanded when the price is increased by one percent. Therefore it is calculated by dividing the percentage change in the quantity demanded by the percentage change in price level. For a normal good own price elasticity of demand is negative. (Walter (2000)) Example: For example an increase in price from $20 to $40 resulting into a decline in quantity demanded from 60 to 30 Percentage change in quantity = (30– 60)/ 60 = -50% Percentage change in price = (40 – 20)/ 20 = 100% Own price elasticity of demand = -50/100 = -0.5 Therefore the own price elasticity of demand for the above example is -0.5. (v)Own price elasticity of supply Own price elasticity of supply refers to the percentage change in quantity supplied when the price is increased by one percent. Therefore it is calculated by dividing the percentage change in the quantity supplied by the percentage change in price level. (Walter (2000)) Example: For example an increase in price from $20 to $40 resulting into an increase in quantity supplied from 30 to 90 Percentage change in quantity = (90 – 30)/ 30 = 200% Percentage change in price = (40 – 20)/ 20 = 100% Own price elasticity of supply = 200/100 = 2 Therefore the own price elasticity of supply for the above example is 2 Section 2: Oil prices: The oil prices in the past have fluctuated by large margins and in the recent times there has been a continued increase in the prices, The price of oil is determined by the supply and the demand of oil in the world. Some of the major producers include Iran, Iraq and Kuwait. From the oil price chart it is evident that the fluctuations in oil prices has been as a result of war and political instability in these oil producing countries, when there is war in these countries the supply level declines and therefore demand exceeds supply, this results into an upward shift in the supply curve the new resulting equilibrium price level is higher and therefore prices increase, a good example is the case where the Iran Iraq war began and the oil prices reached its highest level. These fluctuations can also be explained by shifts in the demand, oil is an important economic input and its demand has been growing at a high rate in the recent past, this increase in the demand over the years shifts the demand curve upwards resulting into higher equilibrium prices therefore prices fluctuate upwards. When prices are high producers increase their supply due to high profit incentives caused by the high price, when supply increases the prices gradually increases shifting the supply curve downward and therefore prices fluctuate downwards. (Eden (2001)) The price elasticity of demand of oil is highly price inelastic and this is due to the fact there exist no close substitute of oil and its products. This means that even when prices increases at a high percentage demand will only reduce by a very small margin. Therefore when the prices rise individuals will still continue consuming oil and therefore prices will rise to peaks because it has no close substitute. On the other hand the price elasticity of supply is relatively high and oil producing countries will produce more when prices are high and this result into a huge decline in prices. In the recent past the prices of oil has been rising and this can be explained by the increasing demand of oil and also due to declining supply as oil reservoirs become depleted, as a result oil prices have been increasing at a high rate in the recent past. Section 3: In the medium term oil prices will continue to rise, this is due to the fact that the demand for oil is still rising each day and therefore the demand curve keeps on shifting upwards and this will result into higher equilibrium prices over time. the other reason why this is the case is that oil is a non renewable resource and due to extensive oil drilling over the years the reservoirs have been depleted and this means that supply is declining, declining supply will shift the supply curve upwards and therefore equilibrium prices will continue to rise in the medium term. (Eden (2001)) In the longer term the prices of oil are expected to decline, the reason why this is the case is that as prices increases the supply will increase, oil exploration efforts will increase due to the high prices in the market as producers aim at increasing their profits due to the high prices, this will shift the supply curve downward shifting the supply curve downward and this will therefore result into lower equilibrium prices. It is also expected that a close substitute of oil will emerge such as bio fuel. The introduction of this substitute in the market will reduce the demand for oil and therefore reduce equilibrium prices. References: Eden, Richard. Energy economics: growth, resources and policies. New York: McGraw Hill Press, 2001. Hardwick, Phillip. Introduction to modern economics. New York: McGraw Hill Press, 2002. Wessels, Walter. Economics. New Jersey: Prentice Hall Publishers, 2000. Read More