AEM250LectureNotes2 - The Market: Four Simple Rules...

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The Market: Four Simple Rules Quantity Price An increase in demand will lead to an increase in both the equilibrium price and quantity. D D’ S P’ P Q Q’ Quantity Price A decrease in demand will lead to a decrease in both the equilibrium price and quantity. D’ D S P P’ Q’ Q Quantity Price An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity. D S’ S P P’ Q Q’ Quantity Price A decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity. D S S’ P’ P Q’ Q Fall in Demand For Oil and OPEC’s Supply Response 1. “With the United States, Japan and Germany in contraction, if not in recession, the forecast is for lower oil prices” (NYT 12/29/01). 2. Hoping to prevent to global economic slowdown from further eroding world oil prices, the Organization of Petroleum Exporting
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Countries (OPEC) finalized an agreement to cut back oil production by 6.5 percent or 1.5 million barrels a day” (NYT 12/29/01). Quantity Price And it worked… (The Economist) Oil (1) • Depleting natural resource, representing 34.5% of world energy supply in 2004 (IEA, Key World Energy Statistics 2004) • Fundamental impact on world economy – “A recent study by the IEA, the OECD and the IMF concluded that a sustained $10 a barrel rise in price could reduce global output by 0.5% after one year. If prices stay around their current level, rather than return to the average of the past four years, then almost one percentage-point might be wiped off global growth.” (Economist, Aug. 21, 2004) • “The second unknown is how expensive oil will affect the world economy. Past surges in the oil price have led to rises in inflation and interest rates that have triggered recessions. This time might be different, partly because growing demand, rather than a reduction in supply, has underpinned the price rise. That means it has been steady and gradual, giving consumers more time to adjust…Dearer oil will eventually curb demand—but at what price, and at what cost to the world economy, nobody knows.” (Economist, Apr. 20,
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This note was uploaded on 03/30/2008 for the course AEM 2500 taught by Professor Poe,g. during the Spring '07 term at Cornell University (Engineering School).

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AEM250LectureNotes2 - The Market: Four Simple Rules...

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