ECON 111 Microeconomics principles
Module Name: Principles of
Microeconomics
2.0 - Introduction
Oil is the worlds’ major source of primary energy; it is used for many purposes such as transportation, power generation, plastics etc. It is the most actively traded commodity market in the world. Fluctuating prices have important effects for oil producers or exporters and the many countries that remain dependent on oil as a key input in their energy, manufacturing and service industries. Riley, G. (2006). 2.1 - The demand for oil
There is a strong link between the demand for oil and the rate of global economic growth because oil is an important input into many industries. Demand for crude oil is affected by the relative price of oil substitutes such as the market price of gas. Sometimes there is speculative demand for oil because purchasers are hoping for a rise in prices on world markets. Almost two thirds of global crude oil production is consumed by the leading industrialized nations. Riley, G. (2006). The following graph shows the world oil demand from the year 1990 to 2005. It shows the increasing demand or increasing the consumption of oil for different purposes.
2.2 - The Supply for oil
When we consider the global supply of oil we need to make a distinction between short term and long term supply to the international markets. The short term supply curve is normally drawn on the basis of a given state of production technology and fixed use of capital inputs. The short run supply of oil is more inelastic. Higher of demand matched against an inelastic short run supply of oil inevitably drives market prices higher. This is shown in the diagram below. Increase in demand causes a fall in oil stocks at the major international refineries and pushes price higher. Riley, G. (2006). The following diagrams show the increasing supply of oil although there is increasing price of oil.
In addition to the above introduction of fuel market in this assignment includes discussion on the effects of war on the fuel and car market equilibrium with the aid of diagrams, discussion of the tax imposition on car effects to the fuel and car market by indicating who pays more tax with illustration of graphs and constructive comments on the issues discussed.
3.0 - Market equilibrium for fuel and car after war outbreak As we know that fuel is one of the main inputs for many sectors. When a war breaks out in a country like Iraq, which is the main producer for fuel in the world, definitely there would be disruptions of fuel supply in the world. It is stated on z facts .com “Oil shortages cause high oil prices causing high gas prices Cheney predicted Iraqi output world return to 3 million barrels per day by the end of 2003. It never made it back to pre-war levels and was below 1.5 M barrels per day in January according to the Wall Street Journal and the Associated Press”. Mckey, P. (2006). So the market equilibrium for fuel and car will change after the war outbreak and the market equilibrium is the point where demand and supply curve meet. Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 45).
3.1 - The market equilibrium for fuel after the war outbreak. When a war occurred in a country that is the main producer of fuel in the world, the supply of fuel throughout the world will definitely decrease. Suddenly people cannot assess the oil, so the oil companies will increase the price of oil. Puvanesselva. (2011). Oil has inelastic demand because there is no substitute and that could be the main reason for not control in price of oil. Huster, S. (2010). Inelastic demand is shown in Figure 2. Note that a change in price results in only a small change in quantity demanded. In other words, the quantity demanded is not very responsive to changes in price. Examples of this are necessities like food and fuel. Consumers will not reduce their food purchases if food prices rise, although there may be shifts in the types of food they purchase. Also, consumers will not greatly change their driving behavior if gasoline prices rise. Hofstrand, D. (2007). Figure 2. Inelastic Demand
The above graph shows that there is little change in quantity when there is greater change in price level. This does not mean that the demand for an individual producer is inelastic. For example, a rise in the price of gasoline at all stations may not reduce gasoline sales significantly. However, a rise of an individual station’s price will significantly affect that station’s sales. Hofstrand, D. (2007).
So, it is understood that there would be higher prices, less supply and little change in quality demand for oil when war outbreaks. The following diagram shows more illustration of oil market after war outbreak.
The diagram shows that the supply decreases from S1 to S2 that is shift in supply curve. The price of oil P1 increases to P2 and quantity of oil Q1 decreases to Q2. The market equilibrium decreases from A to B. This occurs in short run but in long run this will change. In short run the destruction by war to oil infrastructures cannot be recovered, so there would be less oil production or shortage of oil. In long run the destruction by war can be recovered and the maximum oil production can be achieved, so there would be normal market equilibrium. Justin, J. (n.d.). The basic lessons emerged from war outbreak are in general the price of a commodity such as gasoline reflects producers’ costs and consumers’ willingness to pay. Gasoline prices rise if the cost is more to producer and supply gasoline or if people wish to buy more gasoline at the current price. The limited substitutes for gasoline reduce the options available to consumers to respond to price increase. When there is war the supply would decrease and the price will increase because there is no substitute for crude oil. 3.2 - The market equilibrium for car after war outbreak
Before explaining the market equilibrium for car, let’s know complimentary goods. Complimentary goods are goods that can be consumed together to get satisfaction. Example of complimentary good is car with petrol. Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 30-31). The following diagram shows more explanation of market equilibrium for car market after war outbreak.
The diagram shows the price for car decrease from P1 to P2 and there is shift in demand curve of Demand to New Demand or decrease in demand for car. It shows decrease in quantity demand of Q1 to Q2 and shows decrease in market equilibrium from point (P1, Q1) to (P2, Q2). It is understood that raise in price of crude oil decreases the demand for car even if there is no change in price of car. In short run the car usage would be less because there is less supply of oil in short runs. In long run this would change because the market situation will become normal. Hence the car usage would be normal. The car might be a necessity good for some countries where as it might be a luxury good for other countries, depending on the situation. Bromley, R. (2006). As a result of decreasing the demand for car usage the consumers would switch to other type of transportation because the public transportation would be cheaper. If there is no good public transportation the consumers still use cars for their transportation. So the car usage would depend on the availability of transportation.
4.0 - Tax on car
Tax releases the incentive of sellers to sell and consumers to buy. Therefore, tax generally causes output and sales reduction. The following diagram shows the effects of tax imposition. It shows decrease in supply from S to S’ and the quantity demanded decreases from Q to Q’. It also shows that increase in price from P to P’ and market equilibrium decreases from (P, Q) to (P’, Q’). Simple Supply and Demand Diagram. (n.d.).
4.1 - The car market equilibrium after tax imposition
Elastic demand occurs when there is slight change in price to higher change in quantity demand. It is very clear that car has elastic demand that means there would be other substitutes. The following diagram shows that car has elastic demand when tax imposes. The supply decreases from S pre tax to S post tax that is shift in supply and the quantity demand decreases from Q1 to Q2 when there is increase in price due to imposition of tax from P1 to P2. The market equilibrium decreases from (P1, Q1) to (P2, Q2). Indirect taxes. (n.d.). Tax on car will increase the price of cars and the supply would decrease.
4.2 - The market equilibrium for fuel after tax on car
The above diagram shows that the demand for fuel decreases from D1 to D2 and the price decreases from P1 to P2. The quantity decreases from Q1 to Q2 and market equilibrium decreases from (P1, Q1) to (P2, Q2). Diagram showing the shift of demand curve to the left. (2008). It is understood that if tax is imposes on car, the demand for fuel will decrease because they are complementary goods. That might not be the situation if the country is highly depend on car transportation and the demand for fuel might not affect.
4.3 - Suppliers bear more taxes
When tax is imposed the government can make either the buyer or the seller legally responsible for payment of the tax. The legal assignment is called the statutory incidence of the tax. However, the person who writes the check to the government is not necessary the one who bears the tax burden. The actual incidence of a tax is the one who actually bears the tax burden. If it is elastic supplier bears no tax than consumer and if it is inelastic consumer bears more tax than producer. The following diagram shows more details.
Before the imposition of the tax, the number of used cars sold for a price of $7,000 (point A). The tax has statutorily been placed on the seller by shifting the supply curve upward by exactly the amount of tax ($1,000) and the price will rise to $7,400 (point B). Therefore, despite the tax being statutorily imposed on sellers and the higher price shifts some of the tax burden to buyers. A buyer will now pay $400 more for a used car and a seller now receives $7,400 from the sale of a used car, but, after sending the tax of $1,000 to the government, the seller retains only $6,400. This is exactly $600 less than the seller would have received had the tax not been imposed. In this case, each $1,000 of tax revenue transferred to the government imposes a burden of $400 on the buyer and a $600 burden on sellers. As the example shows, the imposition of the $1,000 tax on used cars causes the number of units exchanged to fall from 750 to 500 and the trade results in mutual gains for both buyers and sellers, the loss of mutual benefits that would have been derived had the tax not eliminated 250 units of exchange also imposes a cost on buyers and sellers. The loss is referred to as the deadweight loss of taxation and the triangle ABC measures the size of the deadweight loss by generating neither revenue for the government nor gains for any other party. The actual tax burden does not always fall on those who are statutorily assigned to pay the tax because if a tax is placed statutorily on a seller, the seller may increase the price of the product to consumers who end up bearing some or the entire tax burden. Economic analysis indicates that the actual burden of a tax is independent of whether it is statutorily placed on the buyer or seller. Because market prices will adjust, the incidence of the tax will be identical regardless of who (buyer or seller) writes the check to the government. Taxes. (n.d.). It is very clear that supplier is the one who bears more tax in this situation but this might not be the situation always because different countries have different elasticity of demand on car usage.
5.0 - Conclusion
Crude oil is one of the major inputs for all industries. There is no substitute for oil and the oil consumption is increasing in the world. If there is a war outbreak in a country which is one of the main producers of oil, the supply would be decreased. This will affect whole world oil market and the world economy. If the supply decreases the oil price will increase in the world market. It would be big issues for the consumers who are highly depending on oil such as car transportation. The demand for car might be decreased if the country has good public transportation but if that country does not have good public transportation and people are very much depend on car transportation will not decrease the demand for car. If the country is imposing tax on car for any reason and there is elastic demand for car the consumers will go for other transportations so the supplier would bear no tax. If there is inelastic demand the consumer will bear more tax. If there is elastic demand for car when imposing tax on car the demand for oil will decrease in that country.
6.0 - References
Bromley, R. (2006). Decrease in Demand. Retrieved March 01, 2011, from http://www.raybromley.com/notes/equilchange.html Diagram showing the shift of demand curve to the left. (2008). Retrieved March 06, 2011, from http://welkerswikinomics.com/students/?p=335 Hofstrand, D. (2007). Inelastic Demand, Retrieved March 05, 2011, from http://www.agmrc.org/business_development/getting_prepared/business_and_economic_concepts_and_principles/elasticity_of_demand.cfm Huster, S. (2010). How to understand price elasticity of demand, Retrieved March 05, 2011, from http://www.ehow.com/how_6721566_understand-price-elasticity-demand.html Indirect taxes. (n.d.). Retrieved March 05, 2011, from http://tutor2u.net/economics/content/topics/marketsinaction/indirect_taxes.htm Justin, J. (n.d.). Demand in Short run, Retrieved March 05, 2011, from http://www.coursework4you.co.uk/essays-and-dissertations/sample5.php Mckay, P. (2006). Iraq War makes oil prices higher, Retrieved March 05, 2011, from http://zfacts.com/p/361.html Puvanesselva. (2011). Effects of war on the fuel and market equilibrium, Retrieved March 05, 2011, from http://www.cyberessays.com/Term-Paper-on-Effects-Of-War-On-The-Fuel/35256/ Riley, G. (2006). Market for Oil, Retrieved March 05, 2011, from http://tutor2u.net/economics/revision-notes/as-markets-oil.html Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 30-31). Principles of Microeconomics: Demand Determinants. Malaysia: Meteor Doc. Sdn. Bhd. Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 45). Principles of Microeconomics: Market Equilibrium. Malaysia: Meteor Doc. Sdn. Bhd. Simple Supply and Demand Diagram. (n.d.). Retrieved March 05, 2011, from http://www.capdm.com/demos/gi/gi/GI0103.html Taxes. (n.d.). Retrieved March 05, 2011, from http://www.analystnotes.com/notes/los_detail.php?id=1090
2.0 - Introduction
Oil is the worlds’ major source of primary energy; it is used for many purposes such as transportation, power generation, plastics etc. It is the most actively traded commodity market in the world. Fluctuating prices have important effects for oil producers or exporters and the many countries that remain dependent on oil as a key input in their energy, manufacturing and service industries. Riley, G. (2006). 2.1 - The demand for oil
There is a strong link between the demand for oil and the rate of global economic growth because oil is an important input into many industries. Demand for crude oil is affected by the relative price of oil substitutes such as the market price of gas. Sometimes there is speculative demand for oil because purchasers are hoping for a rise in prices on world markets. Almost two thirds of global crude oil production is consumed by the leading industrialized nations. Riley, G. (2006). The following graph shows the world oil demand from the year 1990 to 2005. It shows the increasing demand or increasing the consumption of oil for different purposes.
2.2 - The Supply for oil
When we consider the global supply of oil we need to make a distinction between short term and long term supply to the international markets. The short term supply curve is normally drawn on the basis of a given state of production technology and fixed use of capital inputs. The short run supply of oil is more inelastic. Higher of demand matched against an inelastic short run supply of oil inevitably drives market prices higher. This is shown in the diagram below. Increase in demand causes a fall in oil stocks at the major international refineries and pushes price higher. Riley, G. (2006). The following diagrams show the increasing supply of oil although there is increasing price of oil.
In addition to the above introduction of fuel market in this assignment includes discussion on the effects of war on the fuel and car market equilibrium with the aid of diagrams, discussion of the tax imposition on car effects to the fuel and car market by indicating who pays more tax with illustration of graphs and constructive comments on the issues discussed.
3.0 - Market equilibrium for fuel and car after war outbreak As we know that fuel is one of the main inputs for many sectors. When a war breaks out in a country like Iraq, which is the main producer for fuel in the world, definitely there would be disruptions of fuel supply in the world. It is stated on z facts .com “Oil shortages cause high oil prices causing high gas prices Cheney predicted Iraqi output world return to 3 million barrels per day by the end of 2003. It never made it back to pre-war levels and was below 1.5 M barrels per day in January according to the Wall Street Journal and the Associated Press”. Mckey, P. (2006). So the market equilibrium for fuel and car will change after the war outbreak and the market equilibrium is the point where demand and supply curve meet. Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 45).
3.1 - The market equilibrium for fuel after the war outbreak. When a war occurred in a country that is the main producer of fuel in the world, the supply of fuel throughout the world will definitely decrease. Suddenly people cannot assess the oil, so the oil companies will increase the price of oil. Puvanesselva. (2011). Oil has inelastic demand because there is no substitute and that could be the main reason for not control in price of oil. Huster, S. (2010). Inelastic demand is shown in Figure 2. Note that a change in price results in only a small change in quantity demanded. In other words, the quantity demanded is not very responsive to changes in price. Examples of this are necessities like food and fuel. Consumers will not reduce their food purchases if food prices rise, although there may be shifts in the types of food they purchase. Also, consumers will not greatly change their driving behavior if gasoline prices rise. Hofstrand, D. (2007). Figure 2. Inelastic Demand
The above graph shows that there is little change in quantity when there is greater change in price level. This does not mean that the demand for an individual producer is inelastic. For example, a rise in the price of gasoline at all stations may not reduce gasoline sales significantly. However, a rise of an individual station’s price will significantly affect that station’s sales. Hofstrand, D. (2007).
So, it is understood that there would be higher prices, less supply and little change in quality demand for oil when war outbreaks. The following diagram shows more illustration of oil market after war outbreak.
The diagram shows that the supply decreases from S1 to S2 that is shift in supply curve. The price of oil P1 increases to P2 and quantity of oil Q1 decreases to Q2. The market equilibrium decreases from A to B. This occurs in short run but in long run this will change. In short run the destruction by war to oil infrastructures cannot be recovered, so there would be less oil production or shortage of oil. In long run the destruction by war can be recovered and the maximum oil production can be achieved, so there would be normal market equilibrium. Justin, J. (n.d.). The basic lessons emerged from war outbreak are in general the price of a commodity such as gasoline reflects producers’ costs and consumers’ willingness to pay. Gasoline prices rise if the cost is more to producer and supply gasoline or if people wish to buy more gasoline at the current price. The limited substitutes for gasoline reduce the options available to consumers to respond to price increase. When there is war the supply would decrease and the price will increase because there is no substitute for crude oil. 3.2 - The market equilibrium for car after war outbreak
Before explaining the market equilibrium for car, let’s know complimentary goods. Complimentary goods are goods that can be consumed together to get satisfaction. Example of complimentary good is car with petrol. Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 30-31). The following diagram shows more explanation of market equilibrium for car market after war outbreak.
The diagram shows the price for car decrease from P1 to P2 and there is shift in demand curve of Demand to New Demand or decrease in demand for car. It shows decrease in quantity demand of Q1 to Q2 and shows decrease in market equilibrium from point (P1, Q1) to (P2, Q2). It is understood that raise in price of crude oil decreases the demand for car even if there is no change in price of car. In short run the car usage would be less because there is less supply of oil in short runs. In long run this would change because the market situation will become normal. Hence the car usage would be normal. The car might be a necessity good for some countries where as it might be a luxury good for other countries, depending on the situation. Bromley, R. (2006). As a result of decreasing the demand for car usage the consumers would switch to other type of transportation because the public transportation would be cheaper. If there is no good public transportation the consumers still use cars for their transportation. So the car usage would depend on the availability of transportation.
4.0 - Tax on car
Tax releases the incentive of sellers to sell and consumers to buy. Therefore, tax generally causes output and sales reduction. The following diagram shows the effects of tax imposition. It shows decrease in supply from S to S’ and the quantity demanded decreases from Q to Q’. It also shows that increase in price from P to P’ and market equilibrium decreases from (P, Q) to (P’, Q’). Simple Supply and Demand Diagram. (n.d.).
4.1 - The car market equilibrium after tax imposition
Elastic demand occurs when there is slight change in price to higher change in quantity demand. It is very clear that car has elastic demand that means there would be other substitutes. The following diagram shows that car has elastic demand when tax imposes. The supply decreases from S pre tax to S post tax that is shift in supply and the quantity demand decreases from Q1 to Q2 when there is increase in price due to imposition of tax from P1 to P2. The market equilibrium decreases from (P1, Q1) to (P2, Q2). Indirect taxes. (n.d.). Tax on car will increase the price of cars and the supply would decrease.
4.2 - The market equilibrium for fuel after tax on car
The above diagram shows that the demand for fuel decreases from D1 to D2 and the price decreases from P1 to P2. The quantity decreases from Q1 to Q2 and market equilibrium decreases from (P1, Q1) to (P2, Q2). Diagram showing the shift of demand curve to the left. (2008). It is understood that if tax is imposes on car, the demand for fuel will decrease because they are complementary goods. That might not be the situation if the country is highly depend on car transportation and the demand for fuel might not affect.
4.3 - Suppliers bear more taxes
When tax is imposed the government can make either the buyer or the seller legally responsible for payment of the tax. The legal assignment is called the statutory incidence of the tax. However, the person who writes the check to the government is not necessary the one who bears the tax burden. The actual incidence of a tax is the one who actually bears the tax burden. If it is elastic supplier bears no tax than consumer and if it is inelastic consumer bears more tax than producer. The following diagram shows more details.
Before the imposition of the tax, the number of used cars sold for a price of $7,000 (point A). The tax has statutorily been placed on the seller by shifting the supply curve upward by exactly the amount of tax ($1,000) and the price will rise to $7,400 (point B). Therefore, despite the tax being statutorily imposed on sellers and the higher price shifts some of the tax burden to buyers. A buyer will now pay $400 more for a used car and a seller now receives $7,400 from the sale of a used car, but, after sending the tax of $1,000 to the government, the seller retains only $6,400. This is exactly $600 less than the seller would have received had the tax not been imposed. In this case, each $1,000 of tax revenue transferred to the government imposes a burden of $400 on the buyer and a $600 burden on sellers. As the example shows, the imposition of the $1,000 tax on used cars causes the number of units exchanged to fall from 750 to 500 and the trade results in mutual gains for both buyers and sellers, the loss of mutual benefits that would have been derived had the tax not eliminated 250 units of exchange also imposes a cost on buyers and sellers. The loss is referred to as the deadweight loss of taxation and the triangle ABC measures the size of the deadweight loss by generating neither revenue for the government nor gains for any other party. The actual tax burden does not always fall on those who are statutorily assigned to pay the tax because if a tax is placed statutorily on a seller, the seller may increase the price of the product to consumers who end up bearing some or the entire tax burden. Economic analysis indicates that the actual burden of a tax is independent of whether it is statutorily placed on the buyer or seller. Because market prices will adjust, the incidence of the tax will be identical regardless of who (buyer or seller) writes the check to the government. Taxes. (n.d.). It is very clear that supplier is the one who bears more tax in this situation but this might not be the situation always because different countries have different elasticity of demand on car usage.
5.0 - Conclusion
Crude oil is one of the major inputs for all industries. There is no substitute for oil and the oil consumption is increasing in the world. If there is a war outbreak in a country which is one of the main producers of oil, the supply would be decreased. This will affect whole world oil market and the world economy. If the supply decreases the oil price will increase in the world market. It would be big issues for the consumers who are highly depending on oil such as car transportation. The demand for car might be decreased if the country has good public transportation but if that country does not have good public transportation and people are very much depend on car transportation will not decrease the demand for car. If the country is imposing tax on car for any reason and there is elastic demand for car the consumers will go for other transportations so the supplier would bear no tax. If there is inelastic demand the consumer will bear more tax. If there is elastic demand for car when imposing tax on car the demand for oil will decrease in that country.
6.0 - References
Bromley, R. (2006). Decrease in Demand. Retrieved March 01, 2011, from http://www.raybromley.com/notes/equilchange.html Diagram showing the shift of demand curve to the left. (2008). Retrieved March 06, 2011, from http://welkerswikinomics.com/students/?p=335 Hofstrand, D. (2007). Inelastic Demand, Retrieved March 05, 2011, from http://www.agmrc.org/business_development/getting_prepared/business_and_economic_concepts_and_principles/elasticity_of_demand.cfm Huster, S. (2010). How to understand price elasticity of demand, Retrieved March 05, 2011, from http://www.ehow.com/how_6721566_understand-price-elasticity-demand.html Indirect taxes. (n.d.). Retrieved March 05, 2011, from http://tutor2u.net/economics/content/topics/marketsinaction/indirect_taxes.htm Justin, J. (n.d.). Demand in Short run, Retrieved March 05, 2011, from http://www.coursework4you.co.uk/essays-and-dissertations/sample5.php Mckay, P. (2006). Iraq War makes oil prices higher, Retrieved March 05, 2011, from http://zfacts.com/p/361.html Puvanesselva. (2011). Effects of war on the fuel and market equilibrium, Retrieved March 05, 2011, from http://www.cyberessays.com/Term-Paper-on-Effects-Of-War-On-The-Fuel/35256/ Riley, G. (2006). Market for Oil, Retrieved March 05, 2011, from http://tutor2u.net/economics/revision-notes/as-markets-oil.html Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 30-31). Principles of Microeconomics: Demand Determinants. Malaysia: Meteor Doc. Sdn. Bhd. Samidi, M, A, Abdullah, N, Ali, J, Mohaideen, Z, M. (2009, P. 45). Principles of Microeconomics: Market Equilibrium. Malaysia: Meteor Doc. Sdn. Bhd. Simple Supply and Demand Diagram. (n.d.). Retrieved March 05, 2011, from http://www.capdm.com/demos/gi/gi/GI0103.html Taxes. (n.d.). Retrieved March 05, 2011, from http://www.analystnotes.com/notes/los_detail.php?id=1090
No comments:
Post a Comment