Question

OPEC deadlocked on oll production hike O prices exceedea $100-a-barel Wednesday ater OPEC said it could not reach an agreement about increasing crude ol production Source: CNN Money, June &, 2011 Consider the market for oil Drew demand and wary arvin Coraleert with the od price exceeding $100 a barre.Label Now suppose that OPEC members agree to increase oll production. Draw a curve to show the effect of this agreement in the market for oil Label t Draw a point at the new market equlibrium. Label it 2 100 110 120 130 140 150 1601 170 Quantity (millions of barels per day)

Answer 1

The chart below gives the initial demand and supply curves at Do and So respectively. The equilibrium price in the first scenario is $112 with oil surging over $100 dollar per barrel as there was no consensus on production increase by the OPEC. "Point 1" represents the initial equilibrium.

However, as the OPEC agrees to increase production, the supply curve moves to the right from So to S1. This translates into decline in price of oil from $112 a barrel to $96 a barrel. At the same time, the quantity demanded increases. "Point 2" represents the new equilibrium after an increase in supply of oil by the OPEC.

136 128 112 96 1 Do GD so lD 12D 130 14 1sD 160 17