Question

2. Consider the global market of oil, which has become quite competitive, so you can rely on the supply and demand graph . A group of oil producing countries (OPEC) would like to impose a price floor, to prevent the price from reaching a low equilibrium level. Show graphically the effect of a successful price floor on oil buyers, sellers, and society at large.

In recent years, the number of new oil producers has risen considerably (one reason among many is the discovery of shale oil). How is this going to affect the market under the same price ceiling? Will OPEC find it easier to maintain the ceiling? Explain.

Answer 1

Price of N-tt-Et- Quantity of Oil → > Di Si Po Qo P > → - » Demand curve for oil supply curve for oid equilibrium price (inital) of oil initial equilibrium quantity of oil represents price floor above equilibrium price Po Quantity demanded of oid with price floor Quantity supplied of oil with price floor Qd Qg > - Price floor is applied when equbbrium price is too low when Price floor is applied then there is an excess supply of oil I as- Qd u in the market

c.so (consumer surplus) is area below demand curve, above equm price P.S. o producer surplus ) is area above supply Curve below equilibrium price 7.S. ( Total surplus) is sum of cs and - P.S. We will measure T.S. with both with and without price ceiling. - If the total surplus declines then the change in total surplus C rather decrease in total surplus > ů the deadweight loss Cowb)

hoe No.: 50 C.S. TS P.S A+B DHE o without +C A&B + C + DIE o ceting 2 with ceiling A+But D B+D A Change (A)-(A+B+C) = -(B+C) = 6 -0 =B-E = -(CHE) for oil buyers we can see that c.s. has declined by area B+C ; thus they are worse off producer for oil sellers ; change in surplus u B-E If area B > E they are better off It BC E they are worse off society as a whole change This decline in total CHE ý a dead weight in TS. " C+E surplus of area loss to the society increase the riguse to - Now suppose oil producers increase thes will shift the supply cuore to the right to 2 and it will give rise to a new equilibrium price of P, which is even lower than the initial equilibrium price of Po

Date : 1 I page no. 51 Price of oid K--*-+ + -7---ta Quantity of Od Qo Qs Qs' when the price ceiling is applicable and supply Shifly to the right new quantity demanded is Qd and new quantity supplied is Qs, Thus excess supply now increases to Qg' - Qd which earlier was Qs - Qd. Thus excess supply increases & it has increased by (as' -as) OPE C will find it tougher to maintain the price ceiling as excess capacity in the market has increased and these sellers would like to sell their product by selling it below the price ceiling HOPE THIS HELPS ☺ KINDLY OPVOTE 1