Question

1) Use the current oil crises to describe the shape of the kinked demand curve that oligopolies face.

2) Do you expect oil priced to jump back up, why/why not? When?  

3) What are some of the pros and cons of cheap oil? Do you prefer one set of trade-offs over the other? Please explain.

4) Provide another example of a cartel (see module for Maple Syrup and Phoebus Cartel info) Explain and provide details. Did it last? Why not?

Answer 1

1. Currently oil prices are going down. There are different reasons like rivalry between Russia and Saudi Arabia. OPEC wanting USA not to enter in oil markets and hence increasing output to reduce prices and making oil products loss making for US based companies etc.

It can be said that firms knew that demand below point a is inelastic and redcuing prices will lead to loss in revenue. However, firms had intention to throw competitors out and hence kept decreasing prices that led to price wars, marginal revenues kept decreasing and now marginal revenue is negative.

2. I expect oil prices to jump back as oil has inelastic demand, after COVID-19 impact gets over , demand will rise again and also OPEC has made an agreement to cut down production, it will be followed and hence rising demand and reducing supply will raise prices. However, it is unlikely to cross $100 per barrel.