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Business Economics 1 - Essay Example

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In order to use the supply and demand economic theory to explain why the real price of oil is currently so high, one must first understand supply and demand in general. This understanding is important because supply and demand concepts are very important in the study of economics, therefore are crucial to the understanding of why our oil prices seem to be embarking on a troubling roller coaster ride.
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Business Economics 1
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Download file to see previous pages As third world countries are moving into the industrialized world, the demand is growing. As this evolution of the world is taking place, more oil is being drawn from the earth, which means one day the oil supply will dry up (Presswire). That does bring about the question of whether or not supply is an issue since we are told frequently that one day the earth will not yield anymore oil.
But as the oil prices go up, one will find that it is because demand is not staying the same. This is making the aspect of supply a little less of a contributor to the increase in oil prices. When using an oil demand curve chart, the demand becomes vertical, but when looking at both the supply and demand curves, one can see that both have been increasing at the same rate for the past twenty years. Yet recently, the supply curve has not moved at all while the demand curve has increased. If supply cannot keep up with demand, then the prices will seen an increase. We probably won't see an increase in the supply aspect until supply reaches maximum production. When this maximum production or extraction of oil occurs, we will see another increase in the price of oil due to the decline of supply until true maximum production is reached. ...
Chances are, the extreme fluctuations in oil prices for the past few years has been due to the fact that maximum production has been reached, which lowers demand. This decrease in demand leads to a decrease in prices just as a decrease in supply leads to an increase in prices. When these price increases happens, the economy sees a recession and when decreases occur everyone feels that all is well (valuesystem).
Supply influences
Unfortunately, the supply to a specific market will not be constant. There are several different factors that influence supply such as:
Price: High prices will influence producers to supply more oil
Cost of production: These are the costs that are associated with the productive resources used to bring the oil to the market. These costs can include labour costs, the cost of materials, etc.
Technological innovations: Oil companies can reduce various costs through new technological innovations that allow them to perform in a more efficient manner at a lower cost.
Objectives of the producer: A lot of times the supply of oil can also be dependent upon profit maximisation. There are certain objectives that oil companies have in mind, which can distort our perception of how the supply aspect is really working. There are also other things such as labour force and climate change that can influence supply.
These are just some of the factors that can influence the supply aspect of oil that, in turn, influences the fluctuations in cost. Yet supply is only half of the equation since demand is also a very important part of the supply and demand economic theory (Souster).
Demand influences
Demand is the amount of goods and ...Download file to see next pagesRead More
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