Question

the price hike continues, what is the effect of oil suppliers market in the long run? How it will affect the individual consumer in the consumption pattern? Explain

Answer 1

Case Specifics

As per the theory of demand and supply, the same would apply in the case study above. With an increase in prices of goods, more suppliers come into the picture to be able to generate more revenue for themselves. However, since the total number of producers in this market type is limited, increase in prices would mean that producers would increase their supply, thereby leading to higher profit margins for the company.

Consider a simple example. As a producer if I were to make 10$ profit per barrel, and this profit increased to 20$ per barrel, I would have an added advantage of producing more, since the profit being earned expands.

On the contrary, the consumer would switch over to alternative fuel which is already happening in real life, as consumers are switching to electrical and other goods and services. The demand for a good is inversely proportional to its price. Meaning that as the price of the commodity goes on declining, the demand for it increases and vice versa.

Conclusion: -

Price has an inverse effect on demand and a straight effect on supply for goods and services. As the price rises, the capacity of the consumer to pay for fuel decreases. The income levels staying normal, fuel becomes expensive for users and they look for other means to fulfil their demand.

The producers on the other hand, gain from an increase in price, as they are able to gain more profits and increase their overall supply.

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