Quantitative Literacy Assignment Name

Quantitative Literacy Assignment Name S

Consider the table below for the supply and demand for oil in the United States. Supply and Demand for Oil – U.S. Price (Y Axis) $ per barrel Quantity Demanded (QD) Millions of Bls per day Quantity Supplied (QS) Millions of Bls per day. On the grid below, create a graph depicting the market for oil using the table above, and plot the QD and the QS. (Use EXCEL to plot the graph on a separate sheet if possible, but not required. Use titles on the graph, axes, and curves.]

Define the law of demand, the law of supply, and equilibrium in one sentence each. If the price of oil is $110 per barrel, is this above or below equilibrium, and is there a surplus or shortage in the market? How much is the surplus or shortage? Explain in one or two sentences. From your graph, explain how a change in the QUANTITY SUPPLIED could occur and give a specific scenario. On your graph, draw what would happen if a small INCREASE in the SUPPLY of oil occurred with a larger DECREASE in the DEMAND for oil. Explain the new position of the supply and demand curves, and the new equilibrium of price and QD/QS compared to the old one.

Paper For Above instruction

Introduction

The dynamic nature of oil markets in the United States often exemplifies fundamental economic principles such as supply and demand. Understanding how prices are determined through these laws is essential for analyzing market fluctuations. This paper explores these principles using specific market data, illustrating the concepts with graphical representation and scenario analysis to demonstrate the responsiveness of the oil market to external factors and policy changes.

Graphical Representation of the Oil Market

Based on the given data, the demand and supply quantities at different price points can be charted to depict the market for oil. For instance, suppose the demand and supply data are as follows: at $80 per barrel, the quantity demanded is 20 million barrels per day, and the quantity supplied is 15 million barrels; at $100, demand drops to 12 million, while supply increases to 18 million. Plotting these points along with intermediate values on a graph with price on the vertical axis and quantity on the horizontal axis will reveal the intersection point, representing the market equilibrium.

This point indicates the price and quantity where the quantity demanded equals the quantity supplied. Such a graphical representation provides visual insight into how market prices are set based on consumers' willingness to buy and producers' willingness to sell at various price levels.

Fundamental Economic Principles

Law of Demand

The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa.

Law of Supply

The law of supply states that, ceteris paribus, as the price of a good increases, the quantity supplied increases, and vice versa.

Market Equilibrium

Market equilibrium is the price and quantity at which the quantity demanded by consumers equals the quantity supplied by producers, resulting in a stable market condition.

Analysis of Market Price and Surplus/Shortage

If the price of oil is set at $110 per barrel, which is above the approximate equilibrium price, the market experiences a surplus because the quantity supplied exceeds the quantity demanded at this price. For example, at $110, if the quantity demanded is 10 million barrels but the quantity supplied is 20 million barrels, the surplus is 10 million barrels. This surplus puts downward pressure on prices, pushing the market towards equilibrium.

Changes in Quantity Supplied

A change in the quantity supplied can occur due to multiple factors, such as technological advancements that reduce production costs or an increase in the number of oil producers. For example, if new drilling technology lowers extraction costs, producers will supply more oil at the same price, shifting the supply curve rightward, increasing the quantity supplied at each price point, thereby influencing the market equilibrium.

Impact of Supply Increase and Demand Decrease

If there is a small increase in the supply of oil coupled with a larger decrease in demand, the supply curve shifts slightly rightward while the demand curve shifts leftward. This results in a new equilibrium with a lower price and lower equilibrium quantity. The intersection point moves downward and to the left on the graph, indicating a decline in market price and the amount of oil traded. The combined effect of supply increase and demand decrease amplifies the market adjustment, leading to a more significant reduction in price than either change alone.

Conclusion

The analysis of the oil market in the U.S. highlights the significance of supply and demand in determining market prices. Graphical depictions provide a clear understanding of equilibrium and illustrate the market's responsiveness to external shocks. Understanding these core economic concepts allows stakeholders to better anticipate market movements and make informed decisions related to energy policy, investment, and consumption.

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