Why is the answer C?
Economics multiple choice help Watch
- Thread Starter
- 13-04-2013 11:56
- 13-04-2013 12:07
oil is highly in demand so if there is a cut in supply more people will demand the good and the price of oil will increase because people will be willing to buy at higher prices oil is a 'Giffen' good where people paradoxically consume more of as the price rises the income effect, leads people to buy more of the good, even as its price rises.
hope this a good explanation
- 13-04-2013 12:17
To elaborate, the demand increases not because oil is a giffen good (there are a controversially few numbers of giffen goods out there, if any at all), but because of EXPECTATIONS (a determinant of demand). Because when the price of oil goes up, the expectation is that it might rise further, which is exactly why people out of fear of even higher prices, demand more. This is further explained by the observation of the price elasticity of demand for oil being somewhat inelastic (since oil is a necessity for most manufactured and essential goods), e.g. consumers will not consume less because of an increase in price.
To summarize, price of oil goes up due to lack of supply, and goes even further up due to increased demand deriving from the expectation of prices rising furthermore in the future, perhaps due to the volatile region of the oil supply (think politics, Middle East, etc.)
Posted from TSR MobileLast edited by matt.3pehr; 13-04-2013 at 12:18.
- 13-04-2013 12:18
C because as the supply has been decreased, demand will rise. Can't be A because a shift to the left in supply means a movement in demand. The reason it isn't a movement along the supply curve is because the cut isn't due to changes in price or shortages in supply, but due to the exogenous factor of OPEC wanting to maintain high oil prices. Can't be B as supply is decreasing, not increasing. Can't be D as demand will increase, not lower. Please do reply if you feel that answer wasn't adequate. It is a tough question.
- 14-04-2013 21:29
I'm sorry but what everyone above me is saying (regardless of it's accuracy) is kinda irrelevant. For the Unit 1 exam all you need to know is that because the supply has moved to the left (and the demand curve has stayed where it is) the equilibrium point has moved up (along) the demand curve.
for example in the above demand/supply graph the supply has changed and as you can see the equilibrium point has just moved along the demand curve.
hope that helps.
Last edited by Squarez; 14-04-2013 at 21:30.