Suppose the price of oil is falling due to a drop-off in demand during the Covid19...

Suppose the price of oil is falling due to a drop-off in demand during the Covid19 crisis. Explain what a group of oil-producing nations (like OPEC) that control a significant amount of the world's oil supplies could do in order to keep prices (and hence profits) high. Use your own words to explain that.

Expert Solution

Suppose at first equilibrium was at point A where demand equals supply. Equilibrium price is P1 and equilibrium quantity is Q1. Now due to COVID demand for oil decreased and demand curve shifts down to D2. If Oil companies does not take action new equilibrium price will be where new demand cuts initial supply curve at point B. In this case price will decrease to P2.

If companies wants to keep the price high. They should decrease the supply. If they decreases the supply of oil, supply curve will shift left to supply 2 as shown in diagram. Now new equilibrium price will be decided at point C, where new demand (D2) intersects new supply (supply 2). In this new equilibrium price will be P1, as it was before COVID and equilibrium quantity will decrease to Q2.

So companies could decrease the supply of they want the price to be higher as before.

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Rahul Sunny answered 2 years ago

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