Market Equilibration in the Oil Industry
ECO/561 - ECONOMICS
April 14, 2015
Instructor: Gloria D. Pearson
Market Equilibration in the Oil Industry
An understanding of the ways market equilibrium is attained after changes occur is critical for decision makers within any business. The elements of supply and demand are important economic principles and understanding the determinants are part and parcel in everyday decisions in a business. The process of equilibration is the movement between two equilibrium points and happens when changes occur in supply or demand. This paper will look at equilibration and explain the process of movements that occurs due to the behaviors of both consumers and suppliers. For this assignment, we will look at movement in the Oil Industry over the past year. Supply and Demand
Economics is the science behind how individuals, institutions, and society make the best choices of how to use scarce resources (McConnell, 2009). One of the concepts which explain interactions between the supply of a resource and the demand for a resource is the law of supply and demand. The law of supply and demand states that the availability of any particular product as well as the demand for the product has an effect on price. In general terms we can see that if there is a lower supply and a higher demand then the price of the product or service will be higher. Comparatively speaking we see that the greater the supply and the lower the demand, the lower the price.
The reasons why the shift of both supply and demand occur is best explained by listing the determinants of supply and demand. These determinants are changes and cause shifts in the entire curve, either supply of demand. The determinants of demand are a change in consumer tastes, a change in the number of buyers, a change in consumer incomes, a change in the prices of complementary and substitute goods and/or a change in consumer expectations. The determinants of supply are a change in input prices, a change in technology, a change in taxes and subsidies, a change in the prices of other goods, a change in producer expectations, and/or a change in the number of suppliers. Any one of these determinants or a combination of factors can shift the supply or demand curves. Efficient markets theory
The efficient markets theory was highly acclaimed in economic academia mainly in the 1970s. At that time, the rational explained that there was an epiphany in economic theory. Economists were filled with enthusiasm that a different and new idea explained everything about market theory. The idea was that speculative asset prices at all times included the best information about actual and real values and that those prices changed only because of worthy, reliable information which was interconnected very well with the theoretical trends and thinking of that time period. Highly thought of financial models of the 1970’s talked about asset prices using sensible expectations that linked together finance theory and the entire economy in one neat and tidy theory (Shiller, 2003). In essence, the theory was that it was impossible to guess what the market was going to do or “beat” the market since the stock market’s automatic efficiency caused prevailing share prices to always integrate and mirror all applicable information available, and on its own. Surplus and shortage
Now we discuss shortages, surpluses and how price is affected to obtain equilibrium in the theory of supply and demand. When we find a surplus in the market of any product we wish to discuss, we see that the market forces will be the price determinant, and prices for the product or service will fall until an equilibrium is determined. This shows that the quantity in demand and the supply of the quantity will change as the price for the product or service as it moves downward until finally equilibrium is achieved. If a market price for the product or service is higher than what...
References: Hirschey, Mark. (2008) Managerial Economics. (10th ed.), Florence, KY: Thomson South-
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, Problems, and Policies (18th ed.). Boston, MA: McGraw-Hill Irwin, EBook
Michelle Willard, The Daily News Journal, (January 2015) Retrieved from: http://www.dnj.com/story/money/business/2014/11/28/gas-cheap-get-cheaper/19613213/
Shiller, Robert J. (2003) Journal of Economic Perspectives, v. 17 iss. 1, pp. 83-104
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