Question

The average people in a country use about 20 barrels of oil each year in a country. And the usage

of this commodity is not avoidable. This is one of the important parts of our expenditure, and this

is the commodity where the price will change quite often.

Years before, around 2010 there were a long period of high prices. And this affects the largest

part of this sector, production stopped because of the hike in prices and the demand side got the

final effect. To manage this situation, the government provides funds for research, to identify the

source of reducing the production cost so as to fix low price.

The period of high prices affects the oil industry a lot and they decided to increase the supply.

Questions:

1. Identify the central economic problems of an economy relating to this situation and

derive your own conclusion.

Answer 1

These problems are basic problems which an economy faces.

Basic problems are as below:

No.1) What to produce: oil has to be produced here and the minimum production must be 20 barrels annually. This is so because consumers cannot avoid such consumption. This is the minimum requirement in each year.

No.2) How to produce: this is the main problem, since price becomes a factor. The price of oil increases frequently and it hampers the demand. Few factories, those are depending upon oil, used to become stopped, when its price increases – this reduces further demand. In order to stop such increasing price, any sort of cost-reduction technique should be implemented by oil extracting firms. The government encourages of doing research for that by providing funds. The firms have taken decision for the increase in supply – this is the economies of scale that keeps the cost down by an increasing supply.

No.3) For whom to produce: this is the problem of finding customers for revenue earnings by firms. Oil industry doesn’t require for searching customers, since the product is so demanded. Customers are always ready; only the right price should be charged to them.