Question

Explain how demand and supply determine current prices of crude oils

Depict the answer with a graph of demand and supply

Explain how future prices of oil will affect the current prices, depict it in a demand supply graph.

how does shale fracking technology affects the current price of oil, accompany a graphy with the response

Answer 1

A. Given that D and S are the demand and supply curve of crude oil. The equilibrium price of crude oil is determined at a point where demand and supply curve intersect. P is the equlibrium price and Q is the equlibrium Quantity.

When price falls below P , Quantity Demanded rises and Quantity supplied falls. This results in eXcess demand for crude oil in the market. In order to bring the market at EQUILIBRIUM position, price of crude oil rises till Quantity Demanded and Quantity supplied are equal.

When price of crude oil rises above EQUILIBRIUM price, Quantity Demanded falls and Quantity supplied rises. This causes excess supply in the market. To achieve equilibrium, price of crude oil falls till equilibrium is achieved.

B. When it is expected that price of crude oil will rise in future, demand for crude will rise at current price. This will cause rightward shift in demand curve from D to D1.

Equilibrium price will rise from P to P1 and equlibrium Quantity will also rise from Q to Q1.

When it is expected that price of crude oil will fall in future, demand for crude will fall at current price. This will cause leftward shift in demand curve from D to D1.

Equilibrium price will fall from P to P1 and equlibrium Quantity will also fall from Q to Q1.

C. Shale fracking technology will increase the production of crude oil. As a result supply will increase. Supplycurve will shift rightward from S to S1. Equlibrium price will fall from P to P1 and equlibrium Quantity will rise from Q to Q1.