Suppose that you have been hired as an economic consultant by OPEC and given the
ID: 1193435 • Letter: S
Question
Suppose that you have been hired as an economic consultant by OPEC and given the following schedule showing the world demand and supply for oil: (60 Marks)
Price ($/barrel)
Quantity Demanded
(millions of barrels/day)
Quantity Supplied (millions of barrels/day)
10
60
20
20
50
30
30
40
40
40
30
50
50
20
60
Your advice is needed on the following questions (use the diagram):
What is the price, quantity of supply and quantity of demand in equilibrium situation?
If the price raises from $20 to $30 a barrel, will the total revenue from oil sales increase or decrease?
What are the values of the price elasticity of booth demand and supply for price changes from $20 to $30 a barrel?
If the price of oil degrease from equilibrium price $30 to new price $20 then:
What do we call the gap between the quantity demanded and quantity supplied?
What is its value?
What is your advice to return to the equilibrium situation?
Price ($/barrel)
Quantity Demanded
(millions of barrels/day)
Quantity Supplied (millions of barrels/day)
10
60
20
20
50
30
30
40
40
40
30
50
50
20
60
Explanation / Answer
Solution :
a) In equilibrium situation the price is $ 30 , quantity of supply is 40 millions of barrels/day , quantity demanded is millions of barrels/day
b) At price = $ 20 , total revenue = price X quantity demanded
Total revenueprice ( $ 20) = $ 20 X 50,000,000
Total revenueprice ( $ 20) = $ 1 billion
At price = $ 30 , total revenue = $ 30 X 40,000,000
Total revenue price (30$) = 1.2 billion
If the price raises from $20 to $30 a barrel, the total revenue from oil sales will increase.
c) Price elasticity of demand = %change in quantity demanded / % change in price
% change in quantity demanded = -20%
% change in price = - 50%
Price elasticity of demand = -20% / -50%
Price elasticity of demand = 0.4 ( Inelastic demand)
Price elasticity of supply= % change in quantity supplied / % change in price
% change in quantity supplied = -33.33%
% change in price = -50%
Price elasticity of supply= -33.33% / -50%
Price elasticity of supply= 0.666 ( Inelastic supply)
d) The gap between the quantity demanded and quantity supplied is called disequilibrium in quantity supplied
e) Its value is 20,000,000 barrels / day
f) To return to the equilibrium situation the prices have to be increased or the production should be increased to match the quantity demanded .
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