PJC_H2_ECONS_P2_Q1

Pioneer Junior College (Economics Department) 1 PJC 2017 H2 Prelim Exam Paper 2 Q1 Question: Oil prices have fallen after the OPEC group of oil producing nations said global crude stocks had risen coupled with Saudi Arabia's production increasing to 10.011 mill ion barrels per day from 9.748 million barrels per day. In addition, a weaker economic outlook means demand for oil in 2017 is likely to grow at a slower rate. Discuss how the above events are likely to impact the market for oil and its related markets. [25] The market for oil works through the forces of dema nd and supply. Demand refers to the willingness and ability to pay at each and every price while supply refers to the willingness and ability to produce a good at each and every price level. Hence, if there are any changes to demand and/or su pply for oil, the market will be affected and the equilibrium quantity and price will change dependin g on the extent and direction of the changes in demand and supply. In addition, the price elasticity of demand and supply can also impact the extent of price changes when demand and supply change. Being an essential factor input that is involved in almost the production of all other goods and services, the change in the price of oil would defi nitely have an impact on many other markets such as air travel, energy and manufactured goods. With reference to the preamble, the rise production of oil by Saudi Arabia and slower growth will impact the supply and demand for oil respectively. With a rise in supply of oil due to the higher prod uction by Saudi Arabia, this will result in a right ward shift of the supply curve. A surplus will occur at the original price, causing downward pressure on price and a subsequent fall in oil prices and an in crease in equilibrium quantity. As demand for oil i s price inelastic due to the fact that it is an essen tial factor input used for producing almost all goo ds and services and a basic commodity, a rise in suppl y against a price inelastic demand curve will result in a huge fall in its price. The preamble also mentioned that growth rate is exp ected to slow down amidst the weaker economic outlook. With slower growth, income levels will rise but at a much slower rate. Demand for goods and services will still increase and this rai ses the demand for oil as oil is a necessary factor input used in essential areas such as transport and energy. The rise in demand for oil will result in a

Pioneer Junior College (Economics Department) 2 shortage at the original price, with upward pressur e on price and ultimately causing the equilibrium price and quantity to increase. With supply of oil being price inelastic as it takes a long time to ca rry out exploration and extraction, the rise in demand against a price inelastic suppl