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Unformatted text preview: a bar, and the equilibrium quantity is 10 million bars a week. When the new cost-saving technology is adopted, the supply of energy bars increases and the supply curve shifts rightward to become the red curve. At $1.50 a bar, there is now a surplus of 10 million bars a week. The price of an energy bar falls to a new equilibrium of $1.00 a bar. As the price falls to $1.00, the quantity demanded increases—shown by the blue arrow on the demand curve—to the new equilibrium quantity of 15 million bars a week. Following an increase in supply, the quantity demanded increases but demand does not change—the demand curve does not shift. animation 9160335_CH03_p053-080.qxd 8:56 AM Page 68 CHAPTER 3 Demand and Supply How Markets Interact to Reallocate Resources Fuel, Food, and Fertilizer The demand and supply model provides insights into all competitive markets. Here, we’ll apply what you’ve learned to the markets for ■ ■ ■ Crude oil Corn Fertilizers Crude Oil Crude oil is like the life-blood of the global economy. It is used to fuel our cars, airplanes, trains, and buses, to generate electricity, and to produce a wide range of plastics. When the price of crude oil rises, the cost of transportation, power, and materials all increase. In 2006, the price of a barrel of oil was $50. In 2008, the price had reached $135. While the price of oil has been rising, the quantity of oil produced and consumed has barely changed. Since 2006, the world has produced a steady 85 million barrels of oil a day. Who or what has been raising the price of oil? Is it the fault of greedy oil producers? Oil producers might be greedy, and some of them might be big enough to withhold supply and raise the price, but it wouldn’t be in their self-interest to do so. The higher price would bring forth a greater quantity supplied from other producers and the profit of the one limiting supply would fall. Producers could try to cooperate and jointly withhold supply. The Organization of Petroleum Exporting Countries, OPEC, is such a group of suppliers. But OPEC doesn...
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This note was uploaded on 04/04/2012 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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