Introduction to Microeconomics - Essay Example

Table 3 shows the trend in oil supply. Generally, oil supply shows an increasing trend just like price and demand, albeit at a slower pace. Supply grew by only 13.38 during the period. It should also be noted that dips in oil prices are matched by corresponding shrinks in the total supply. Oil supply also dropped during 1998, 2001, and 2002. The law of demand states that "All else equal, as price falls, the quantity of demanded rises, as price rises, the quantity demanded falls" (McConnel and Brue 2002, pp. 41). This declares that there is an inverse or negative relationship between price and demand.

Tables 1 and 2 above shows the generally increasing trend in oil prices as well as oil demand which clearly violate the law of demand. In a situation where the oil price is rising, we must expect that the quantity demanded to fall as it discourages the purchases of higher priced commodities. However, the mounting demand notwithstanding the rise in prices can be explained by the factors which are exogenous or are outside the price-demand model. During the past years, there has been a boom in the automobile industry due to the increased purchases of cars and other transportation systems.

The airline industry is also showing slight recovery with the proliferation of low cost carriers and the strong activity in the tourism sector. This trends and developments in the global market become the key drivers of oil demand. As the nation and the world as a whole, are becoming more and more industrialized, we also became more dependent on oil to fuel our technologically more advanced equipments. Nowadays, the importance of the oil industry can never be overstated. International demand for oil has also been increasing in order to support the growing economies of the prospective giants like China (Some factors 2005).

Insufficiency in this resource will surely facilitate the spillover of negative externalities in the entire economy. Oil has become a necessity. Higher prices have not strongly hindered customers from purchasing their much needed fuel to facilitate the efficiency of their everyday activities. On the other hand, the law of supply can be stated as follows: "As price rises, the quantity supplied rises, as price falls, the quantity supplied also falls" (McConnel and Brue 2002, pp.47). This gives price and quantity supplied a positive or direct relationship.

Tables 1 and 3 shows that both oil price and quantity supplied is generally in a upward trend with corresponding dips in 1998, 2001, and 2002. This shows a close positive relationship between the two variables as well as the responsiveness of quantity supplied to oil prices. The empirical evidence shows that the oil industry follows the law of supply. The oil industry has been adjusting to the higher global demand by increasing its production. Oil companies have been very keen in taking the opportunity of producing higher oil quantity in order to accommodate the expected mount in global demand.

Although economies of scale must have