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Microeconomics

Analysts are most concerned that Iran, Pope’s second-largest oil producer, will fail to compromise on its nuclear operations and Israel will launch a pre-emotive attack against them. Bank of America Merrill Lynch estimated a major supply disruption of Iranian crude would push Brent crude up by as much as $40. “A conflict between Israel and Iran could have severe consequences for global oil production and striation,” Bank of America Merrill Lynch said in a report. “A sustained rise in oil above $1 50 would likely push the U. S. Into recession. China’s first quarter economic growth figures, due Friday, are also expected to provide a cue for the oil market as the country is a major consumer of fuel. In other energy trading, heating oil was up 0. 5 cent at $3. 12 per gallon and gasoline futures added 0. 4 cent at $3. 30 per gallon. Natural gas fell 0. 2 cent at $1. 98 per 1,000 cubic feet. Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Created By: Marcel/11 Topic: Microeconomics (Demand & Supply) word count: 700 Microeconomics By Bernhard-Marcel could disrupt global crude supplies.

Demand is the quantity

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of a good or service that consumers are willing and able to purchase at a given price in a given time. The rising price of oil will have certain impacts on the market because oil is important to nearly all areas of economy. Market is an actual or nominal place where buyers and leers interact (directly or through intermediaries) to trade or purchase goods and services. In figure 1 above, it shows the market for oil in the economy and how the changing oil prices will impact in the market (assuming other factors are constant, sisters Paramus).

As you can see, the supply curve shifts from SSI, which tells us less quantity of oil being supplied (from Y Y 1) by Iran, Pope’s second-largest oil producer due too military attack from Israel or the US after the negotiations about Iran’s nuclear program hasn’t succeed and some acceptable compromise achieved. Moreover, a haft in supply curve leads to the new equilibrium price as it’s drawn in the graph (Sq Gel) and thus the general price level will increase from (Pee Peel) and the firm has risen its price to maintain its revenue.

Whenever there’s a shift of either demand or supply curve, the market will, if left to act alone, adjust a new equilibrium. This means when the price of oil is increased/decreased, new equilibrium position is made. This graph also tells us the elasticity of oil is highly inelastic which means the price of oil is volatile. The price can change widely because it won’t effect a significant hang in the quantity demanded, as there’s still no substitute good for oil. Furthermore when the price of oil goes up, generally the price of other goods like cars and motorcycles will increase as well because they both complement each other.

Rising oil prices usually promote a negative reaction from most people. While there are definite disadvantages to high oil prices, there are some indirect effects that aren’t necessarily good or bad, Just not always expected. The definite disadvantages would be a country that’s heavily rely on oil to maintain their growth rates, like the US ill eventually decrease its output resulting lower GAP and if the price of oil keeps increasing in the upcoming months, it will have a higher inflation that leads to that country in the bottom of the trade cycle (see figure 2) or recession situation.

As you know, a recession country will experience high unemployment because firms have to cutback their output in order to obtain profits due to an increase cost of production. Investments are routed in that direction and this helps create Jobs therefore it will reduce the unemployment rate of that country. Also when oil prices go up, many investors look elsewhere for investment options and this has a stimulating effect on the economy.

Both demand and supply-side factors create instability in commodity markets. As a result, the best solution would be the government intervene the market by operating a buffer stock scheme to protect prices from extreme fluctuations. To do this, the government sets a price band with a highest price and a lowest possible price. It then intervenes in the market whenever free market forces push the price either above the top price or below the bottom price. This is shown in figure 3.

In this case, the situation is that supply of oil is decreased as Iran’s nuclear facilities could disrupt global crude supplies (SSL SO), then this will push the price above the acceptable top price. At that price, there would be excess demand (shortage) of IQ SQ. Hence, the government would intervene to prevent the price from going above the top price and if it’s over, the government could subsidize it. This is shown in figure 4. However there are also many problems associated with this solution. Most of the problems like governments may have poor information, etc.

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