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Chapter 2

Chapter 2 Supply and Demand.pdf

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Boston University
CAS EC 102
Jay Zagorsky

Chapter 2: Supply and Demand Saturday, January 18, 2014 2:24 PM I. Supply and Demand of Oil ○ Oil is a commoditywhose price fluctuates dramatically  In the 1970's, oil price was low and stable □ Price of Arabian light crude was $2 a barrel  Formationof a cartel in oil, reduced supply made it $10 a barrel □ Heavy impact on world economy;dropped growth from 5% to under 1%  Price went up to $13 and then $26 in the 1980'sand continued to rise □ Growth fell to almost 0% in 1983 ○ How Big us a Barrel of Oil?  A barrel holds 42 US gallons  Heat and pressure crack each 42 gallons of crude into 44 gallons of gasoline II. World Oil Consumption ○ The world has been using more and more oil  The world used more than 20 million barrels a day in 1960  Increased to 87 million barrels a day by 2011  Petroleum use is almost1.2 million barrels per day ○ US's Share of World Oil Consumption  US share has been decreasing but the absolute amount of oil usage per day in the world has been rising □ In the 1960, US consumed almost half the oil used in the world everyday □ By 2011,US consumption dropped to under 25% □ US is becoming less important part of petroleum markets over time III. Ideas behind Demand Curves ○ Oil usage is an increasing function over time ○ Actual results are based on many business decisions that are interconnected  Changes in the complexchain result in the price paid by consumers a. Demand Curves ○ Demand is not based solely on wants but also on the ability to purchase  Consumers must want the product and have the means to buy ○ Always slope downward from left to right  Substitution effect: People find substitutions for things that are too expensive or have gone up in price □ Many power stations can generate electricity with coal  Income effect: When income goes up, people buy moreof normal goods □ When income goes down, people buy more inferior goods □ When prices fall, the left over money is equivalent to more income (morepurchase power) ○ Law of Demands:Higher the price, the less people want to buy  Lower price results in more people want to buy or there are more consumers entering the market b. Demand Movementsand Shifts ○ Movementsalong the curve are made by price changes ○ Shifts are caused by factors that is not price  Changes in incomes and wealth  Tax changes  Prices of substitutes and complementschange  Prices of substitutes and complementschange  Taste change  Expectationsof future prices  Number of buyers ○ If countries are interested in moving the demand curve of oil to the left, they can reduce the costs and improvepublic transportations IV. Ideas behind Supply Curves ○ Supply is how much businesses want to and are able to sell at a given price ○ Upward sloping curve  Incentive to produce is high when the price is high ○ No law of supply; sometimesbend backwards to meet target amounts  Workers have a target earnings, so will cut hours when pay is high a. Supply Movementsand Shifts ○ When the price of the product increases, companies produce more ○ Shifts are caused by factors that is not price  Changes in input price  Technological improvements  New discoveriesthat makes the product more or less effective  Natural diamonds used to drill are replaced by synthetic diamonds  Current oil fields are running dry  Canada's new sand splitting technologies  Discoveryof new oil fields V. Where Are Energy Data? ○ Detailed data are collectedby the International Energy Agency (IEA)  Created in the 1970sduring the energy crisis ○ Oil importing countries join the IEA to help other countries when oil supplies are disrupted in the world  Each countries hold a 90 day reservein case of emergency ○ Less detailed reports can be found on the CIA's World Fact book VI. Equilibrium ○ Where the supply and demand curves intersect  No pressure for the price to go higher or lower  The invisible hand always brings supply and demand to the equilibrium point a. Shortages and Surplu
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