The simple economics of supply and demand

According to Blitzer David, the fundamental economics of supply and demand indicate that oil will not be back at $100 anytime soon. The main topic of discussion in this piece of information is pricing changes. Oil as a result of changes in the global demand and supply scenario. Because the price of oil is so important to a country, it is necessary to apply concepts acquired in class that are applicable to the article. One of the concepts dealt with in class is about economic growth which refers to the capacity of a country or organization to produce services and goods as compared between different periods. It can be measures in terms of inflation. Based on the scenario given in the article, as the prices of oil move up or down, inflation follows the same direction. Primarily, this is the case because oil is a major input of the economy as it is used in activities such as heating homes, transportation and if cost increase, the cost of end product follows the same route (Blitzer, 2014). The economic growth in a country impacts oil consumption and its demand. In return, the country see considerable positive impact in the capital market as companies can handle their cost associated with doing business in the industry.

Decision making and cost benefits analysis is another fundamental concept learnt in the course. This refers to the advantages of specific action that can outweigh its drawbacks. Institutions and governments have to develop strategies that are well defined and within the boundaries of the markets share of the product under consideration (Blitzer, 2014). At the time of economic challenges due to fall in prices of oil, analysis and industrial insiders have to develop strategies to predict the rate at which rate should be raised to stimulate positive economic effect. This calls for the need to carry out cost-benefit analysis of all the propose strategies to select one that will have the highest perceived benefit (Blitzer, 2014).

Also, it is critical to consider the cost of production. In some countries such as United States oil production cost can be substantially high. The shutdown prices can be at minimum when average variable cost is taken into consideration if the organizations are unable to set right prices (Blitzer, 2014). Further, fall in prices makes it difficult for the organization to return production to the original level. The high cost of producing crude oil in the U.S raises questions about shale operation’s sustainability. This can be due to slow growth of economy in Europe and decrease in demand in China. In return, this places the major production companies under significant pressure owing to the historically reduced prices (Brad, 2004).

Finally, demand is a critical concept when it comes to crude oil business. According to the article, the demand for this commodity is inelastic in the sense that it does not have many substitutes in the market (Brad, 2004). As such, it is expected that changes in prices for oil does not led to alterations its demand as people cannot decrease their demand immediately owing to rise in prices.

Application of one Economic Concept among the Given Choices: Supply and Demand

One of the concepts selected among the given choices is supply and demand. Decrease of prices of oil is due to shift in both the demand and supply curves. The article show outward shifts in supply of crude oil owing to discoveries in the rigs of United States, for instance, Texas and North Dakota which has led to increase in supply (Brad, 2004). Another reason attached to the decrease in prices is fall in demand for the commodity. This has been because of stagnation on economic growth in China and Europe. The oil production has barely increased on the past three years, yet since 2013, there has been considerable increase in demand for consumption of commodity due to the economic growth (Brad, 2004). For instance, importation of oil from China to United States has only increased by few barrels. As an outcome, the U.S has had little amount for consumptions which has been exacerbated by increase in the average prices.

Effect of Concept Identified in Question 2 to the United States’ Economy

Based on the concept of supply and demand for oil, it is evident that the industry faces price levels and low quantity as well. As such, there has been weakening of the oil market in the United States. Reduction of oil prices lead to decrease in cost of living. There has been direct relationship between the costs of transportation which has affected the cost of living. However, it is expected that because of the economic recovery in the country, the demand is likely to increase at an increase rate (Huidrom, 2015). As such, taking this and other factors that contribute to the supply and demand for the oil, it is anticipated that the price of the increase. This can be identified by focusing on the current statistic, unemployment and inflation rates.

The concept of supply and demand led to increase in federal rates which have remained almost the same since. In return, this has affects the banking system which in turn affect the market and demand and supply in return. These alteration has led arise because of inability of the economy to reach maximum level of spending to boost the overall demand. This is because some of the major suppliers of oil for United States, for example, China and Iraq experience significant reduction in supply which rise demand for this commodity in the country (Jorgenson, Gollop & Fraumeni, 2016). As this happen, its consumers have to purchase it at inflated prices. At the same time, most of oil companies in the United States have big debts and have lost more than ninety percent of their capital market in the industry.

Conclusion

The article states that oil prices drops have been driven by increased supply from North Sea and due to recession. This has been followed by reduction in demand that shift prices and quantity of oil to the lower side of the curve. It is clear that the author has concisely determined the major points related to the prices change of oil. I agree with the article that even the demand for oil goes up; it will not lead to decrease in supply. At the same time, it is agreeable that, whether this supply for this commodity decreases, this will not cause increase in demand. Furthermore, it is evident that there will be shrinkage of the market supply in the future and demand will rise at higher rate.

References

Blitzer, D., (2014). The simple economics of supply and demand suggests oil will not be back @ $100 soon. Retrieved 18th Feb, 2016 from http://economictimes.indiatimes.com/markets/commodities/the-simple-economics-of-supply-and-demand-suggests-oil-will-not-be-back-100-soon/articleshow/45370312.cms?intenttarget=no

Brad, S. (2004). The Effects of the Recent Oil Price Shock on the US and Global Economy. Retrieved 18th Feb, 2016 from http://pages.stern.nyu.edu/~nroubini/papers/OilShockRoubiniSetser.pdf

Huidrom, R., (2015). Macroeconomic implications of the recent oil price decline. Retrieved 18th Feb, 2016 from http://blogs.worldbank.org/prospects/macroeconomic-implications-recent-oil-price-decline

Jorgenson, D., Gollop, F. M., & Fraumeni, B. (2016). Productivity and US economic growth (Vol. 169). Elsevier.