oil and gas equilibrium

• Figure 2 is a more explicit representation of the long-run supply curve as we work to provide the world with 96 million barrels of oil per day.[2] The first reserves developed are the least expensive, from the on-shore Middle East at $10-$25 per barrel, then the Offshore Shelf at $40, and then from a variety of sources that keep price near $50 until we need 85 million barrels per day. Then the price to bring on new supplies rises rapidly, with U.S. shale at $65, oil sands at $70 and Artic oil at $75. These marginal suppliers all find themselves on the cusp of the 96.3 million barrels produced in 2015. Looking back, it is hard to imagine the long-run price of oil slipping under $50. Looking forward, global growth in demand at 1.0 to 1.5 million barrels per year will require higher prices near $65-$70.

MARKET EQUILIBRIUM AND GOVERNMENT INTERVENTION

MARKET EQUILIBRIUM

DEFINITION

The quantity in which producers are willing to produce and the consumers are willing and able to purchase.

 QUANTITY DEMANDED = QUANTITY SUPPLIED 

 

DETERMINATION OF EQUILIBRIUM PRICE AND QUANTITY

1. From demand and supply schedules
2.  From demand and supply curves

  
DEFINITION OF GOVERNMENT INTERVENTION
The imposition of certain directives by the government,which interferes with the market mechanism.

TYPES OF INTERVENTION

1. Price control(price floor or minimum price and price ceiling or maximum price)
2. Indirect tax and subsidy

PRICE CONTROL  
a)Minimum price(price floor)

• imposed by the government when market price is extremely low
• Where government help push up the price(agricultural products)
• At minimum price,supply exceeds demand:therefore,its creates SURPLUS. 

       

ADVANTAGES 
=Higher income for FARMERS 

DISADVANTAGES

1. Consumers have to pay higher price
2. The problem of surplus.Government has to buy the excess stock by using taxpayers money
3. The excess stock has to be disposed-causes wastage.

b)Maximum price(price ceiling)

• imposed by the government when market price is exorbitantly high
• usually imposed during inflation or war
• at maximum price,demand exceeds supply:therefore,it creates SHORTAGE.   

 



ADVANTAGES
Consumers pay lower price


DISADVANTAGES

1. Due to the problem of shortage,people are willing to pay higher price.This encourages black market and smuggling activities.
2. Since limited supply,government has to ratio or redistribute
3. Encourages exploitation by the producers.

    

 TAXES
 

DIRECT TAX

Imposed directly on to a person(income tax,company tax).

INDIRECT TAX

Imposed on an entity but that entity can shift the burden of paying tax to someone else(sales tax,import tax).

EFFECTS OF IMPOSING INDIRECT TAXES ON GOODS

 The imposition of indirect tax will cause the producer to reduce supply.Therefore,supply curve will shift to the left(Supply without tax -->Supply with tax). As a result,price goes up and quantity reduced.

    

Elasticity

FORMULA

DEGREE OF PRICE ELASTICITY OF SUPPLY

DEGREE	DESCRIPTION	VALUE OF COEFFICIENT	SLOPE OF SUPPLY CURVE
ELASTIC	%CHANGE Qs > %CHANGE P	SUPPLY ELASTICITY > 1
INELASTIC	%CHANGE Qs < %CHANGE P	SUPPLY ELASTICITY < 1
UNITARY	%CHANGE Qs = %CHANGE P	SUPPLY ELASTICITY = 1
PERFECTLY ELASTIC	AT LEVEL P,Qs is infinity	SUPPLY ELASTICITY = INFINITY
PERFECTLY INELASTIC	NO CHANGE IN Qs ALTHOUGH P CHANGES	SUPPLY ELASTICITY = 0

 

example for Tesco bread

inelastic demand

• for petrol

 petrol has few alternatives because people with a car need to buy petrol. For many driving is a necessity. There are weak substitutes, such as train, walking and the bus. But, generally, if the price of petrol goes up, demand proves very inelastic.

elasticity of supply

Given the following data for the supply and demand of movie tickets, calculate the price elasticity of supply when the price changes from $9.00 to $10.00.

We know that the original price is $9 and the new price is $10, so we have Price (Old) =$9 and Price (New) = $10. From the chart, we see that the quantity supplied when the price is $9 is 75 and when the price is $10 is 105.

So we have:

Price (Old) = $9
Price (New) = $10

Quantity Supplied (Old) = 75

Quantity Supplied (New) = 105