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Demand and supply factors? International petrol price rose from USD40 per barrel to...

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swinkle | Student, Undergraduate | eNotes Newbie

Posted May 10, 2009 at 11:35 AM via web

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Demand and supply factors?

International petrol price rose from USD40 per barrel to USD140 per barrel. List some factors that you think may have influenced demand and supply respectively to explain their impact on the rise of petrol price. Recently, international petrol price fell down from USD140 per barrel to USD40 per barrel. List some factors that you think may have influenced demand and supply respectively to explain their impact on the fall of petrol price.Also explain with diagrams of each increase and decrease in petrol prise through demand and supply curves?

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krishna-agrawala | College Teacher | Valedictorian

Posted May 12, 2009 at 11:08 PM (Answer #1)

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The classical relationship of prices with demand and supply is well known. When prices rise the supply tends to increase and demand trends to decrease. When prices fall the opposite happens - supply tends to decrease and demand tends to increase. The relationship between price and supply, often represented by a supply curve is influenced by the supply cost at different supply volumes. Similarly, the demand curve is influenced by the value derived by customers at various consumption levels.

The inverse of the relationships explained above are also true. Prices tend to increase when supply reduces or demand increases. Similarly, prices tend to decrease when supply increases or demand reduces. This is in short the classical frame work of supply demand framework.

However, the wild fluctuations in the petrol crude prices witnessed in recent times cannot be explained by these theories alone. The change in basic cost structure for producing crude, and the value of using the crude could not have fluctuated to the extent that would be necessary to cause the kind of fluctuations in price that actually took place.

The factors that could have actually caused the wide fluctuations in crude prices include the following.

  • Prices being based more on likely demand and supply in future rather than the immediate demand and supply. There is great degree of uncertainty because of limited reserves of crude in the world and some fast expanding economies.
  • Artificial restriction on production of crude by major producers of crude.
  • Artificial manipulation of price by large cartels of buyers with the intention of making quick money to benefit from short term trading.
  • Covert action by government of some countries to manipulate the prices to their economic and/or political advantage.

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