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Article analysis - Essay Example

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The theory of demand and supply is one of the most conventional theories in the discipline of microeconomics that has been the reference point of many to determine equilibrium price. The intersection between the points of demand and supply forms the basis of determination of the…
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Article analysis

Download file to see previous pages... The oil producers in the U.A.E. are expected to increase production of oil as a response to this fall (Cornwell, 2014). This reaction of the government is contrary to the conventional economic theory which states that if the price falls then the suppliers should reduce the level of their production. But this is not happening in case of the U.A.E.
The economic theory of demand and supply fundamentally states that as price of a product increases less and less quantity of the product is demanded and as the price of a product rises then its supply increases. The equilibrium market price is determined by the point where the quantity demanded by the consumers equals to the quantity supplied by the producers (Frank, 2008). The following diagram shows the same.
The initial equilibrium point is marked by E1 and the initial equilibrium price is P1 and the quantity demanded is Q1. A fall in the market demand due to exogenous market conditions like recessions or weak demand of the products causes the price to fall and the demand curve shifts to DD2 where the new quantity is Q2 and the price falls to P2 (Frank, 2008).
Following this theory it should be expected that a global fall in prices would discourage the suppliers and they should reduce their production. However, according to the news article this is unlikely to happen. U.A.E. is expected to produce 3 million barrels of oil by the end of the current financial year. According to experts factors like weaker growth of China, rise in shale production in the U.S.A. and oversupply of oil are the main factors that are responsible for the global fall in oil process. A fall in the global oil prices could be represented by a downward shift in the demand curve from point DD1 to DD2 where quantity demanded equals quantity supplied. The new equilibrium point is reached at E2.
However, the determination of oil production in the global economy does not follow the cardinal ...Download file to see next pagesRead More
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