Question

9. THE WORLD MARKET FOR OIL Using a supply and demand diagram: a. Illustrate what happens when economic growth boosts world demand. a1. in the short run a2. in the long run as producers invest in new oil wells a3. in the long run as consumers find substitutes for oil b. Similarly, describe the short- and long-run consequences of a negative supply shock similar to the 1970s shock. c. If you observed an oil price rise, how in principle could you tell whether it was driven by supply-side or demand-side developments? d. How would the diagram, and the response to shocks, be different if there were: d1. a competitive market composed of many producers? d2. a single monopoly oil producer? d3. an OPEC cartel controlling 100% of world oil production and seeking to maximize the combined profits of its members? e. Why would individual OPEC member countries have an incentive to produce more than the quota assigned to them? f. Does this logic carry over to the situation in the real world where there are also non-OPEC producers?

          9. THE WORLD MARKET FOR OIL
Using a supply and demand diagram:
a. Illustrate what happens when economic growth boosts world demand.
a1. in the short run
a2. in the long run as producers invest in new oil wells
a3. in the long run as consumers find substitutes for oil
b. Similarly, describe the short- and long-run consequences of a negative supply shock similar
to the 1970s shock.
c. If you observed an oil price rise, how in principle could you tell whether it was driven by
supply-side or demand-side developments?
d. How would the diagram, and the response to shocks, be different if there were:
d1. a competitive market composed of many producers?
d2. a single monopoly oil producer?
d3. an OPEC cartel controlling 100% of world oil production and seeking to maximize the
combined profits of its members?
e. Why would individual OPEC member countries have an incentive to produce more than the
quota assigned to them?
f. Does this logic carry over to the situation in the real world where there are also non-OPEC
producers?

9. THE WORLD MARKET FOR OIL
Using a supply and demand diagram:
a. Illustrate what happens when economic growth boosts world demand.
a1. in the short run
a2. in the long run as producers invest in new oil wells
a3. in the long run as consumers find substitutes for oil
b. Similarly, describe the short- and long-run consequences of a negative supply shock similar
to the 1970s shock.
c. If you observed an oil price rise, how in principle could you tell whether it was driven by
supply-side or demand-side developments?
d. How would the diagram, and the response to shocks, be different if there were:
d1. a competitive market composed of many producers?
d2. a single monopoly oil producer?
d3. an OPEC cartel controlling 100% of world oil production and seeking to maximize the
combined profits of its members?
e. Why would individual OPEC member countries have an incentive to produce more than the
quota assigned to them?
f. Does this logic carry over to the situation in the real world where there are also non-OPEC
producers?

Added by Todd R.

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