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It's Economics - Assignment Example

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This will be as a result of the fact that in the long run the market will be able to adjust itself to respond to any changes in Quantity demanded and…
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It’s Economics Assignment Q1. This will happen in the long run relationship between the quantity supplied (S1 and S2) and quantity demanded (D1 and D2). This will be as a result of the fact that in the long run the market will be able to adjust itself to respond to any changes in Quantity demanded and supplied and the price of the oil. In the long run the price will first rise from P1 to P2 and then adjust itself due to entry of more firms to P3 which is lower despite the increment in the quantity of oil demanded; hence Nadler-Kafferlin will be right (Taylor et al, p 261).
Price in $ S1 S2
P1 long run supply curve
P3
P2 D2
D1
Units of crude-oil-based diesel fuel
Q2
The park argument is that there will be an increase in the supply of the natural gas, this will lead to a decrease in the price in the long run, hence consumers will benefit. Thus making the gas fueled track cheaper to use (Taylor et al, p 261).
S
S’
Price
P
P’
D’
D

Q Q’ Quantity of gas supplied
From the graph the quantity of gas supplied will keep increasing for the ten years as shown from S and S’, the price will drop from P to P’ thus making the claim by Park company true.
Q3
a.

Oil price
LRAC (oil)
Quantity of output
From the Long Run Average Cost (LRAC) curve, as the prices of the crude oil drop, the firm will operate at an increasing output enjoying the economies of scale as the factors of production are still not fully utilized. This will continue up to the point indicated by the arrow, the minimum efficient scale (MES) where the Long-term Average Cost will start increasing and the operation at that level will lead to cost increasing faster than the output, hence having diseconomies of scale.
b.

Price of gas
LRAC (gas)
Output
The Long Run Average Cost (LRAC) curve for the gas prices will take longer than the one for oil in the economies of scale section as the prices of gas is assumed to drop further from the analysis of Park Company and hence the tractor company will enjoy increased output for a longer time.
Q4.
To maximize profit I will choose to use gas as its Long Run Average Cost LRACs curve stays within the economies of scale section a for long period thus increasing output and maximizing the profit. This is from the fact that the gas prices will drop for a quite longer time.
Q5.
The following information will help to ascertain which of the two theories is true, the world reserves of both the gas and the oil and the political status of the countries which produces them. Some countries may be unfriendly and thus punish the importing country and our company by hoarding the products or increasing the prices. The amount of the world reserves of the both the oil and the gas and which one will supply the demands for long time. The current and the likely future legislation which may favor the use of either of the two products, gas or the oil depending on the effect of on environment.
Q6.
The best strategy for the company is the one that increases the output at the least price possible. This will ensure the firm uses the most economical sources of energy. The best strategy will be picked by critically analyzing the two claims and how realistic they are in reducing the cost. This will be guided by the shape of the Long Run Average Cost for both the gas and the oil. This may involve even the use of independent energy consultant who should give the details regarding the legislation governing the use of the two sources of energy and more on future trends.
Work Cited
Taylor, John and Weerapana Akila. Principles of Microeconomics: Global Financial Crisis. Stamford: Cengage Learning, 2010. Print. Read More
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