Question

Crude oil between 2015-2019

• Use the model of supply and demand and provide a textual and diagrammatic explanation, using the supply and demand curves for the changes in the prices of the good

Answer 1

Demand curves for the changes in the prices of the good:-

Presently ,The demand of crude oil falls throughout the world. This happens because of the determinate of income of consumers. Crude oil requires basically in automobile sectors, plant and machinery, transportation, etc Therefore, the demand curves shifts towards lett and makes equilibrium at lower price.

Suppose if the crude oil price went down from $70 per barrel to $15 per barrel in between 2015 to 2019.

E0 is the earlier equilibrium where demand and supply meet. The coresponding equilibrium price is $70 and quantity is Q0. Now, the demand curve shifts left as D1. This makes equilibrium at E1 point, where quantity of consumption reduces to Q1 and price reduces to $15.

Supply curves for the changes in the prices of the good :-

Now there is the production cut, which reduces supply.This happens because of the determinate of very poor expectation of suppliers about the future market. The supply curve shifts towards left but this fall is lower than the demand fall :-

The new equilibrium becomes E1, where D1 and S1 meet. This shifts E0 earlier equilibrium level to the E1 new level. Price drops to $15 and quantity drops to Q1.

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