In: Operations Management
Illustrate the following with supply or demand curves:
a. In 2017, the Motiva refinery at Port Arthur, Texas, was forced to shut down due to Hurricane Harvey. It was the largest refinery in the United States. Along with Motiva, other refineries in the area were also shut down, accounting for almost 20 percent of the country's capacity. Which way would you expect the price of oil to go?
b. A sudden frost during the spring season leads to a large number of cherry trees to lose their flowers. Which way will the price of cherries go?
c. In 2018, the United Kingdom witnessed one of the hottest summers according to the Met Office. The average temperature was 15.80 C (60.40 F), similar to what is was in 1976, 2003, and 2006. With Britain in a prolonged period of heat, mobile air conditioners gained popularity. Which way will the price conditioners go?
Answer a= As there is a decline of 20% of the total country's capacity of oil production, the price of the oil is going to be increased according to the law and demand and supply when the supply decreases, the price of the product increases.
This can be seen from the above figure, The initial supply curve is shown by S1 and the corresponding price is P1. When the supply reduces and the supply curve moves upward, the quantities supplied reduces to Q2 and the price is increased from P1 to P2.
Answer b= a large number of cherry trees to lose their flowers due to bad weather, the supply of cherry will be affected negatively due to lower harvest of cherry, and thus the price will increase as per the law of demand and supply.
This can be seen from the above figure, The initial supply curve is shown by S1 and the corresponding price is P1. When the supply reduces and the supply curve moves upward, the quantities supplied reduces to Q2 and the price is increased from P1 to P2.
Answer c= As there is an increased demand but the supply of AC remains constant, then as per the law of demand, the increase in demand will also cause an increase in the price.
In the above figure, let D1 is the initial demand for AC. At this point, the price of each AC is P1 and the demand is Q1. When the temperature rises, D1 shifts upwards to D2, the quantity demanded increases from Q1 to Q2 and as the supply is constant, the price will increase from P1 to P2