ECN(12).pdf - 7 Understanding changes in equilibrium price...

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Unformatted text preview: 7. Understanding changes in equilibrium price and quantity Aa Aa a Suppose you are an analyst in the oil refinery industry and are responsible for estimating the equilibrium price and quantity of home heating oil. To do so, you must consider factors that can affect the supply of and demand for heating oil. Determinants of the demand for heating oil include household income, the price of an oil furnace (a complement to heating oil), and the price of natural gas (a substitute for heating oil). Determinants of the supply of heating oil include the cost of crude oil and the cost of refining crude oil into home heating oil. Use the calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator. Tool tip: Use your mouse to drag the green line on the graph. The values in the boxes on the right side of the calculator will change accordingly. You can also directly change the values in the boxes with the white background by clicking in the box and typing. When you click the Calculate button, the graph and any related values will change accordingly. PRICE [Dollars per barrel] EQUILIBRIUM CALCULATOR: MARKET FOR HEATING OIL 30 Price of Heating Oil I 70 [Dollars per barrel] ‘0 Quantity Demanded 120 Quantity Supplied 30 60 [Thousands of barrels/day] [Thousands of barrels/day] Shortage 40 Surplus 0 50 [Thousands of barrels/day] [Thousands of barrels/day] 40 DEMAND SHIFTERS SUPPLY SHIFTERS Price of Natural Gas I Cost of Crude Oil [Dollars per 1,000 cubic ft.] 30 [Per barrel of heating oil] 25 3 Price of an Oil Furnace I 2000 Cost of Refining Oil [Dollars per furnace] [Per barrel of heating oil] Average Annual Income I | I | I I I I [Thousands of dollars] ‘0 CI 20 AD 60 30 100 120 140 160 QUANTITY [Thousands of barrels per day] 30 20 10 Suppose that all of the determinants of supply and demand for heating oil are equal to their initial values. (If you've changed any of them, click the Reset to Initial Values button.) The equilibrium quantity in this market is 80,000 \/ barrels of heating oil per day, and the equilibrium price is $40 \I per barrel. Explanation: Close A The market for heating oil is in equilibrium when the price of heating oil is such that the quantity of heating oil demanded equals the quantity of heating oil supplied. In this case, when the price of heating oil is $40 per barrel, the quantity demanded and quantity supplied both equal 80,000 barrels of heating oil per day. Suppose that the cost of crude oil increases from $25 to $45 for each barrel of heating oil produced. Assuming that the rest of the determinants of supply and demand for heating oil remain equal to their initial values, the market will ...
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