Economics Assignment - Essay Example

Such a development is likely to hike the price of oil given that the demand for oil remains fixed. The pressure upon the price level is heightened given the fact the unavailability of suitable substitutes of the product. The key terms to be addressed in the present paper are demand and supply schedules, equilibrium points and substitutes. Demand and supply schedules constitute of the market forces prevalent in nation. While the former is the locus of various price levels and the corresponding amount of aggregate demand made by the consumers, the latter is the reflection of the aggregate amount that the suppliers are going to provide in the market at any given level of price (Mankiw, 2008, p. 65). Equilibrium points are determined at the intersection of demand and supply schedules; these are the points at which aggregate demand and aggregate supply match with one another.

An economy is expected to operate at the equilibrium point at its optimum (Frank & Bernanke, 2006, p. 66). Lastly, substitutes imply the goods which both consumers and suppliers are likely to replace for any particular commodity. If two goods are perfect substitutes, any discrepancy in the market forces of one is reflected in that of the other. For instance, a shortage in the supply of one leading to a hike in its equilibrium price level will be mirrored through a hike in the demand for another good that is a perfect substitute, as more and more people rush to avail the latter commodity instead of the first.

However, if two goods are imperfect substitutes, a discrepancy originating in one will not be reflected much in that of the other (Poterba, 1999, p. 31). The present problem is that of a situation that is likely to arise due to a crunch in the availability of oil. Since oil could be used for multiple purposes and does not have many substitutes to replace it perfectly, the demand for oil could be regarded to be quite inelastic in nature (represented by the red curve). On