ECO1101: Principles of Microeconomics
Introduction In the world today, there are many reasons why the price of petroleum is increasing. In this assignment I have explained why the petroleum price increases and the demand and supply factors are causing the price to increase. Statistics show that the price increases because of income, expectation and so on. What the government do to subsidise the price from rising to high is caused by the instability of the Middle East market. This is the statistic graph:
i) Using demand and supply analysis (market analysis), discuss in detail TWO demand factors and TWO supply factors that have led to the increase in price of petroleum in the world.
What are the demand factors that have led to the increase in price of petroleum? One of the factors is that when the income of the world changes, the demand in petroleum increases gradually. According to research.stlouisfed.org, the agency attributes the increase in demand to rapid economic expansion in several countries, particularly China. When the economic expands it causes the demand curve to shift rightward and the supply curve to stay constant. When that happens, the price will increase from P to P1 and the quantity to increase from Q to Q1. Moreover, petroleum being a normal good has a positive relationship with the quantity demanded. So when the income of the world increases, so does the demand of petroleum.
The second factor would be expectations. According to research.stlouisfed.org, in 1995, India’s oil consumption was approximately 1.6 million. The EIA predicts that India’s future consumption will grow rapidly from 2.2 million in 2003 to 2.8 million by 2010. Moreover, when the expected demand increases, so will the price; thus an expectation is under a demand factor. In expectations, the relationship is also positive. As the quantity increases, so will the