On Sept 4, 2014 oil was priced at $94.51 a barrel. Assume the market for oil was

Question

On Sept 4, 2014 oil was priced at $94.51 a barrel. Assume the market for oil was in equilibrium at this point in time. On Sept 4, 2018, oil was priced at $69.82 a barrel. Assume this represents a new equilibrium condition in the oil market.

A) What change in the demand (Write INCREASE OR DECREASE) for oil would explain the recent decrease in the price of oil? How would you demonstrate this graphically that is would there be a movement UP along the curve or movement down along a stationary demand curve, OR a rightward or leftward shift in the demand curve?

B) What change in the supply (Write INCREASE OR DECREASE) for oil would explain the recent decrease in the price of oil? How would you demonstrate this graphically that is would there be a movement UP along the curve or movement down along the stationary supply curve, OR a rightward or leftward shift in the supply curve?

C) Would you expect the equilibrium quantity of oil in 2018 to be higher or lower than in 2014? OR is the equilibrium quanity outcome uncertain? Explain.

Explanation / Answer

A) Decrease in demand has caused the fall in price of oil

--To raise the demand for oil prices have been reduced.

There would be UPWARD MOVEMENT because of fall in the price of oil quantity demanded increase,it is called expansion. The movement is caused only if the quantity demanded changes due to change in price.

B) with the INCREASE in supply the price of oil is reduced

--Due to excess supply of oil in comparison to demand ,the prices fall.

There will be upward movement in the supply curve.

C) The equilibrium quantity outcome is uncertain in 2018 because it is unknown that how supply is decreased or demand is increased.

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