Supply and Demand Simulation
Supply and demand are two terms that assist economists in understanding economic principles. These expressions are used in both microeconomics and macroeconomics to determine the behavior of consumers in the market. The oil industry can be covered in both microeconomics and macroeconomics. The demand for oil establishes how much oil should be supplied in a given economy. Equilibrium indicates the level at which the demand for oil equates to the supply of oil in an economy. On a broader level, it is in the interest of oil-producing countries to offer more oil, but they cannot dictate how much oil should be released into the world market. An invisible hand is responsible for manipulating oil production while the price ceiling will cushion the poor from being exploited by the oil marketers.
In microeconomics, demand curves and supply curves are utilized to portray how a change in price influences the demand or supply of oil. A demand curve slopes downwards to indicate that as the price goes up, the quantity demanded reduces. A supply curve slopes upwards, meaning that the supply of oil in the economy rises as the price goes up. When the supply curve shifts to the right, it illustrates that there is an increase in the supply of oil in an economy while a shift towards the right in the demand curve portrays an increase in demand for oil due to many people buying vehicles.
Equilibrium in microeconomics is a point of intersection, where the demand and supply curves cross each other. In this case, the equilibrium point indicates that the supply of oil in the economy equates to the demand for oil. Once the equilibrium is achieved, the economy cannot experience a shortage of oil. When demand rises due to an increase in the number of vehicles on the road, the price increases, the demand curve is likely to shifts towards the right while the price rises to trigger more supply, until a new equilibrium is achieved.
In macroeconomics, the invisible hand indicates the ability to pursue self-interest while promoting the well-being of everyone in society. In a free market, the demand for goods and services determines what would be supplied in the market. The price is the principal determinant in this market. Market prices are the instrument in which the invisible hand brings supply and demand into balance in all the markets that constitute the economy (Mankiw, 2012, p. 249). When the market demands more oil products than what it can supply, a shortage may occur. This scarcity may push the prices upwards.
The price ceilings are established to ensure that companies that aim at making huge profits do not exploit customers. The prices of oil around the globe have been rising at a rapid rate since the 1970s. As the price rises, many firms that depended on oil for the manufacturing of their goods started shifting towards less-intensive methods of production. In the long run, the demand curve becomes elastic, meaning that a slight change in demand caused a significant change in the quantity of oil demanded. The government steps in when the price becomes unbearable to customers. When the government sets a ceiling price, the demand for oil increases. The supply will only increase if the price set is favorable. Thus, the government should optimize oil prices to favor the customer, as well as maintain the real economic purpose.
A rightward shift in the demand curve results in a rise in both equilibrium price and equilibrium quantity (Hall and Lieberman, 2010, p. 75). A strong economic growth that is experienced in Asia, as well as the Middle East, will cause a shift on the demand curve towards the right side. The equilibrium price of oil will rise upwards while equilibrium quantity increases to a new height. This change will lead to a new equilibrium at point P2 Q2, as shown in Figure 1.
A leftward shift in the supply curve causes a rise in equilibrium price and a drop in equilibrium quantity (Hall and Lieberman, 2010, p. 75). Oil prices are extremely volatile, and when the suppliers have pessimistic market expectations, they may decrease the supply, causing the equilibrium price to go up. An increase in government regulation may also cause a decline in supply. This shift is illustrated by a rise in equilibrium price to P2 and a reduction of the quantity brought in the market from Q2. Figure 2 below illustrates a new equilibrium at point P2 Q2.
The oil industry relies heavily on demand and supply. The global demand for oil is on the rise while the oil reserves are being exhausted, creating a shortage of oil in the market. When the demand rises, the price will go up. Suppliers will be motivated to increase the supply of oil in the market. When the supply of oil equates to its demand, equilibrium is achieved, and the market tends to maintain the equilibrium price. Sometimes, the government can interrupt the market if the prices are too high. The government may establish a price ceiling, which will favor both the suppliers and the customers. However, a free market is guided by an invisible hand, which regulates the supply and demand, as well as drives the market to equilibrium.
Hall, R. E., & Lieberman, M. (2010). Macroeconomics: Principles & applications. Australia: South-Western Cengage Learning.
Mankiw, N. (2012). Principles of Macroeconomics. Stamford, CT: Cengage Learning.