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Economics Commentary Demand and Supply

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Introduction

OPEC: no control over prices? Price Elasticity of Supply is a measure of the responsiveness of the quantity supplied of product (A) to a change in price of product (A) alone. Surplus is a situation in which the quantity supplied exceeds the quantity demanded for a good or service; the price of a good is above equilibrium price. Another term to note is demand: the amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. Typically, quantity demanded decreases with increases in price. Lastly, supply is the total amount of a good or service available for purchase. Typically, quantity supplied increases with increases in price, in this article. In this article, OPEC had decided to reduce oil production to hopefully increase the rapid decline in oil prices, however their plan did not work and oil prices continued to plummet. ...read more.

Middle

Crude prices however continued to drop by 5% as financial markets fell across the globe. This decrease in demand and price drops also caused an oil surplus, as OPEC was overproducing 300,000 barrels a day above its own quota of about 29 million barrels. The reason OPEC decided to drop these production rates can be explained through Figure1. As one can see, in this graph, as the supply of oil decreases from S1 (oil) to S2 (oil), the prices tend to increase from P1 to P2. Price/Unit S2 (oil) S1 (oil) P2 P1 D (oil) Q2 Q1 Qsold Although it can be seen that in the short term, the production cut backs have not achieved much of the desired goal, in the long run, as the economy begins to reconstruct itself, oil prices will steadily rise due to these production cuts. ...read more.

Conclusion

This drop in oil prices affects motorists; with the drop in prices, consumers can buy gas for a less amount of money. Also, low income earners can switch from using inferior goods to normal goods from saving money originally used for gas. Low oil prices can negatively affect stock markets. Falling oil prices are a barometer of weakening demand and a softening global economy. Which is bad news for earnings -- and the energy-heavy S&P 500 index that includes, Chevron and Apache to name a few. Firms that can't raise prices will find profit margins squeezed - and will have to cut back on production and jobs. Even if some producers of energy-intensive products can raise prices enough to cover higher energy costs, they'll nonetheless sell fewer of their products because of those higher prices. So they too will have to cut back on production and jobs. ...read more.

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