• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Economics portfolio- price controls

Extracts from this document...


Oct. 24, 2008 The Organization of Petroleum Exporting Countries cut oil production targets for the first time in almost two years as the group battles to slow a collapse in prices.OPEC decided to lower supply by 1.5 million barrels a day from November, oil ministers said today at the end of a meeting at the group's Vienna's headquarters. The reduction will be from the existing quota for 11 members of 28.8 million barrels a day. "Demand is significantly less than what is being supplied, that is the reason the cut was taken," Saudi Arabian Oil Minister said after the meeting. Crude oil has tumbled 56 percent from a July 11 record of $147.27 a barrel as the financial market crisis spreads, job cuts increase and fuel consumption slows. "The high oil prices from the past years contributed to the slowdown in demand and the subsequent downturn in the economy," White House spokesman Tony Fratto said in a statement, which also criticized OPEC's policy of restricting supply. ...read more.


Due to the current economic downturn, many industries using oil as energy have either closed down or reduced their production rate and demand for oil is reduced at considerable level. Thus, the prices are going down. In the last two years, OPEC had drastically increased production to tackle high oil prices. This supply is now in excess and is driving down oil prices thus forcing OPEC to cut supply. Maximum Price controls (ceiling) It is a situation where a maximum price is set below the equilibrium price which prevents producers from raising the price above it.In order to see that these prices are maintained, it becomes essential to increase supply. Minimum price controls (floors) : It is a situation where a minimum price is set below the equilibrium price which prevents producers from reducing the price below it.These prices can be maintained by reducing supply or by government interference such as buying the excess supply or setting a reserve. ...read more.


To correct this, the supply needs to be reduced. In a situation of low supply, which has the potential to drive oil prices extremely high, OPEC responds by asking member nations to increase supply in order to reduce the price below top price. As shown in the fig below, the low supply causes price to reach above maximum price. These steps are advantageous as they help to stabilize prices.But, there's also a setback. These steps undermine the ideals of the free market system according to which, the prices should be determined solely by market forces. If the current oil prices are low, consumers should be allowed to benefit from them. On the other hand, if the prices are high, producers should be free to benefit from them. Also, there is a question of long term benefits of these steps. These steps will stabilize the prices only for a short period of time. Eventually, the market forces will act and destabilize the prices until the equilibrium is finally attained. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays


    CAUSES OF OPEC'S SUCCESS 1) In 1999, the oil prices had fallen to about $10/barrel. This was largely due to the Asian financial crisis that led to a fall in demand, while supply was largely unregulated, due to OPEC's inability to check the quotas of its members.

  2. Growth and Development Problem Set - IB Economics exam questions and answers.

    Economic growth refers to increases in the quantity of output (goods or services) produced over a period of time (usually a year) per capita. Gross Domestic Product (GDP) refers to the market value of all goods and services produced within a country in a given period.

  1. Economics Extended Essay - To what extent has the market for paintings in South ...

    Speculators do not only speculate on paintings, therefore when they saw the drop in price of paintings, they stopped speculation in the art market and moved to speculating on other things where they would get a better return. This reduced the demand for paintings even further.

  2. Macro Economics Notes

    money supply or an increase in the popularity of a countries products overseas. Creeping inflation and hyper inflation (worksheet) Laissez Faire economics v Interventionist economics We (Turkey and most other countries around the world) are in the same position - recession' defined as 2 consecutive quarters of negative GDP growth.

  1. Market Failre Portfolio

    This will shift the MSC curve upwards, and therefore this will reduce consumption to the socially efficient level of output (Q*). Also the government will gain significant revenue and Barack Obama plans on using the majority of this money to expand the Children's Health Insurance Program.

  2. Commentary 1: ...

    The decision, announced in the early hours of Thursday, came as little surprise. Saudi Oil Minister Ali Naimi, whose country is OPEC's biggest producer and its de facto leader, had sounded an upbeat tone about current crude prices and ruled out any possibility that a cut was in the offing.

  1. economi portfolio

    Figure 2 : abnormal profit Figure 3. losses It is said in the article that this year "earnings will not reach the high levels of previous years.". It may be possible that VW will make only losses, which is shown in figure 3.

  2. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    This reason is the implementation of knowledge towards accumulation of wealth; this isn?t possible with communist ideals. This arguably takes from the motivations of the entrepreneur and levels the playing field for everybody under the system. A distinction of classes will disappear with the communist structure, as classes no longer exist.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work