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Current event - Essay Example

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Shifting Crude Oil Prices Shifting Crude Oil Prices Current event 1 Free Trade and Specialization (Comparative Advantage) Free trade and specialization is an economic concept that states a party’s aptitude to produce a certain good or service at a marginally lower cost as compared to others (Schmitz, 2011)…
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Shifting Crude Oil Prices Shifting Crude Oil Prices Current event Free Trade and Specialization (Comparative Advantage) Free trade and specialization is an economic concept that states a party’s aptitude to produce a certain good or service at a marginally lower cost as compared to others (Schmitz, 2011). This means that even when a particular party or country for that matter has absolute efficiency and advantage in producing the good or service both can still exist and stand a chance of gaining profits through trade given that they have different comparative competences. Take for instance a case where a worker in country A is able to produce two eggs and eight fish every hour and a worker in country B who is having less input being able to produce four eggs and six fish per hour. The two countries can really benefit from trade since their trade-offs between eggs and fish are different. In such a case, country B has a relative advantage in producing fish while country A has a relative advantage in producing eggs. In fact, the two countries can major on what they can best produce and bring forth to the market for trade. Each country can therefore benefit by specializing in producing goods and services where it has comparative advantage and trading the goods with the partnering country. The researcher intends to discuss oil production in relation to shifting cost of oil. In order to understand the cause of escalating oil prices in the world, it is imperative to establish the determinants of supply and demand. In addition, it is vital to study factors that cause demand and supply curves to shift as this will clearly indicate the effects on prices and quantity of oil when equilibrium changes. To start with, the interaction between buyers and sellers in any given market determines prices of goods. Prices are indicators of a shifting supply and demand, which causes a change in market prices and consequently affecting incentives on consumers and producers. This paper will mainly focus on how demand/supply forces cause price adjustments in the oil market. The rising cost of oil is mainly due to the rise in popularity of hybrid vehicles, increased use of plastics in making of products, depleting crude oil resources in the world, and oil drilling actions in preserves such as Alaskan (Schmitz, 2011). These actions causes the shifts in demand and supply as illustrated in below. The rising popularity and manufacture of hybrid vehicles that takes in large amount of fuel causes a shift in demand as follows Pe S P2 D2 D Q2 Qe Increasing use of plastics in production of goods causes a shift in demand for oil towards the right given constant supply, this trend causes a shift in price from the lower PE to a higher price P2 as shown. Q2 indicates the quantity demanded because of the shift. P2 S PE D2 D Qe Q2 A decline in production and supply of crude oil worldwide due to declining levels of crude oil results in a shift in price from equilibrium to P2 and a consequent drop in equilibrium quantity demanded as shown below S2 S P2 PE D Q2 QE Oil drilling actions in more areas of Alaskan preserves causes a shift in supply and an increase in prices as indicated in the graph below S S2 PE P2 D QE Q2 These reasons coupled with an increase in demand for oil causes the demand curve shift to the right where both price and quantity of oil sold increases. If these trend remains as it is there is a possibility that the quantity demand for oil will go up and at the same time a rise in price is expected as in the graph that follows S P2 P D2 D Q Q2 On the other hand, the decrease in supply of crude oil caused by political instability in oil producing countries such as Libya has had a sharp decline in the quantity of oil sold in market today. The effect has prompted increase in demand, prices and a consequent move in the supply curve to the left as shown. S2 P2 S P D Q2 Q Current event 2 Economics in action (the price of admission) Opportunity Cost (Trade-offs) Opportunity cost refers to what you forego to achieve what you want (Mankiw, 2011). It involves choosing the best alternative out of the available options. The intention in opportunity cost is choosing the most preferred alternative, which should be desirable, and well-paying than the options foregone. The modern world is having trouble in looking for the best alternative in to solving the current shortage in fuel. This search can be likened to the options available for a certain industry to either produce guns or butter as shown by the graph Economists are busy researching on the best alternative for crude oil. In fact, the best alternative seems to lie in the use of electric cars though it seems to pose a challenge in terms of the benefits against crude oil as it comes with extra cost of production. In this regard, the best alternative the world should focus in solving escalating oil prices should be one that is economically sustainable and friendly to the ecosystem (World Bank, 2006). Opportunity cost mainly focuses on the best option that will give best returns as in the following options Although this is the case, other factor such as marginal and total costs come into play as indicated below. The alternatives available in this case may be between the use of electric vehicle and the use of other alternative sources of fuel because in the absence of crude oil, other sources should be sought for as the second best alternatives for crude oil. In conclusion, more research need to be conducted in order to come up with the best alternatives to replaces the ever-depleting crude oil sources otherwise future advances in technology may stall because of inadequate sources of energy. References: Mankiw, N. G. (2011). Microeconomics. London: Cengage Learning EMEA Schmitz, A. (2011). The economics of alternative energy sources and globalization. Oak Park, Ill: Bentham eBooks World Bank. (2006). Sustainable land management: Challenges, opportunities, and trade-offs. Washington, DC: World Bank Read More
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