Daniel l. Rubinfeld

More documents

Recommendations

Info

50 Part 1 Introduction: Markets and Prices f .~---------------------------------------------------------------------------=---, 2 The Basics of Supply and Demand 51 60 ci M§%§ff &±± ¥ Piifi¥ You should verify that these numbers imply the following for demand and competitive supply in the short rllI1: 30 Slzort-rlill demand: o = 24.08 - 0.06P Short-run competitive supply: Sc = 11.74 + 0.07P ~ 40 .!::. " :; c... t 30 ~ '-' Of course, total supply is competitive supply plus OPEC supply, which we take as constant at 10 bb/yr. Adding this 10 bb/yr to the competitive supply curve above, we obtain the following for the total short-nm supply: SllOrt-rilIl total supply: ST = 21.74 + 0,07P 10.".,,_- You should verify that the quantity demanded and the total quantity supplied are equal at an equilibrium price of $18 per barrel. You should also verify that the corresponding demand and supply curves for the long I'lln are as follows: I I I 1975 I I I I I 1980 I I I I I I I 1985 I I I I I I I I I I 1990 1995 I I 2000 Long-rull demand: Long-ntn competitive supply: Long-rull total supply: o = 32.18 0.51P Sc = 7.78 + 0.29P ST = 17.78 + 0.29P The OPEC cartel and political events caused the price of oil to rise sharply at times. It later fell as supply and demand adjusted. This example is set in 1997, so all prices are measured in 1997 dollars. Here are some rough figures: • 1997 World price S18 per barrel • World demand and total supply = 23 billion barrels per year (bb/yr) • 1997 OPEC supply = 10 bb/yr • Competiti\'e (non-OPEC) supply = 13 bb/yr.l2 The following table giyes price elasticity estimates for oil supply and demandY SHORT-RUN LONG-RUN World demand: -0.05 - 0.40 Competitive supply: 0.10 0.40 lc:\on-OPEC supply includes the production of China and the fonner SO\'iet republics_ 13 For the ~~urces of these numbers and a more detailed discussion of OPEC oil pricing, see Robert S, Pmdyck. Cams to Producers from the Cartelization of Exhaustible Resources," Rel'iew or Eco/lolllics aild Statlsilcs 60 (\!a~ 1978): 238-51; James:vI Griffin and Da\"id J. Teece, OPEC Beilllc'io;' and World Oil Prices (London: Allen and Cnwin, 1982); and Hillard G Huntinaton, "Inferred Demand and Supply Elasticities from a Comparison of World Oil Models," in T St~rner, ed, Intemational E/lewll Ecollomic:' (London: Chapman and Hall, 1992) LV Again, you can check that the quantities supplied and demanded equate at a price of $18. Saudi Arabia is one of the ,'>'orId's largest oil producers, accounting for roughly 3 bb/yr, which is nearly one third of OPEC production and about 13 percent of total world production. What would happen to the price of oil if, because of war or political upheaval, Saudi Arabia stopped producing oil We can use our supply and demand curves to find out. For the short lUll, simply subtract 3 from total supply: SllOrt-rllll demand: o = 24.08 0.06P SllOrt-nlll total supply: Sr = 18.74 + 0,07P By equating this total quantity supplied with the quantity demanded, we can see that in the short nm, the price will more than double to $41.08 per barrel. Figure 2.21 shows this supply shift and the resulting short-nm increase in price. The initial equilibrium is at the intersection of ST and D. After the drop in Saudi production, the equilibrium occurs where S' T and 0 cross. In the long I'UI1, however, things will be different. Because both demand and competitive supply are more elastic in the long run, the 3 bb/yr cut in oil production will no longer support such a high price. Subtracting 3 from long-run total supply and equating with long-run demand, we can see that the price will fall to $21.75, only $3.75 above the initial $18 price. Thus, if Saudi Arabia suddenly stops producing oil, we should expect to see more than a doubling in price. However, we should also expect to see the price gradually decline afterw"ard, as demand falls and competitive supply rises, As
52 Part 1 Introduction: Markets and Prices 2 The Basics of Supply and Demand 53 Price -45 (dollars per -41 barrel) -40 35 30 zH- Figure 220 shmys, this is indeed vvhat happened following the sharp decline in Iranian and Iraqi production in 1979-1980. History mayor may not repeat itself, but if it does, we can at least predict the impact on oil prices. 14 w ')~ ..:...:J 20 18 15 10 5 0 0 5 10 15 20 23 25 30 35 Quantity (billion barrels/yr) (a) In the United States and most other industrial countries, markets are rarely free of government intervention. Besides imposing taxes and granting subsidies, go\-errunents often regulate markets (even competitive markets) in a variety of ways. In this section we will see hm'\' to use supply and demand curves to analvz~ the effects of one common form of government intervention: price controls. Later, in Chapter 9, vve will examine the effects of price controls and other forms of government inten-ention and regulation in more detaiL Figure 2.22 illustrates the effects of price controls. Here, Po and Qo are the equilibrililll price and quantity that would prevail without government regulation. Price -45 (dollars per barrel) -40 35 30 T _J 20 18 15 Price 5 10 5 0 0 5 10 15 20 23 25 30 35 Quantity (billion barrels/yr) (b) The total supply is the sum of competitive (non-OPEC) supply and the 10 bb/yr of OPEC supply. Part (a) shows the short-run supply and demand curves. If Saudi Arabia stops producing, the supply curve will shift to the left by 3 bb/yr. In the shortrun, price will increase sharply. Part (b) shows long-run curves. In the long run, because demand and competitive supply are much more elastic, the impact on price will be much smaller. *** P max ~-.--+---~ I I I I I I I I I I .~ I ------r Excess Demand I I Quantity Without price controls, the market clears at the equilibrium price and quantity Po and Qo. If price is regulated to be no higher than P maX' the quantity supplied falls to Qj, the quantity demanded increases to Q2' and a shortage develops. can obtain recent data and learn more about the world oil market by accessing the Web sites of the American Petroleum Institute at \\\\"iiilpiorg or the US Energy Information Administration at ei(1,doe.go\
Page 1 and 2: 0-13-016583-2 TOO
Page 3 and 4: Iii Iii iii Iii Iii Iii Iii Iii Iii
Page 5 and 6: PART 1 Introduction: Marl
Page 7 and 8: x Contents Contents xi 2 Producers
Page 9 and 10: xiv Contents Contents 3 9.2 111e Ef
Page 11 and 12: - Contents Contents 17 18 16.4 Effi
Page 13 and 14: F xxii Contents Example 17.3 Reduci
Page 15 and 16: --.. -~---.--.. '~~~~~~-~----------
Page 17 and 18: PART 1 surveys the scope of microec
Page 19 and 20: 4 Part '1 Introduction: Markets and
Page 21 and 22: 8 Part 1 Introduction: Markets and
Page 25 and 26: 16 Part 'I Introduction: Markets an
Page 33 and 34: 32 Part 1 Introduction. Markets and
Page 35 and 36: 36 Part '1 Introduction Markets and
Page 41: 48 Part 1 Introduction: Markets and
Page 47 and 48: few years ago, General Mills decide
Page 49 and 50: 64 Part 2 Producers, Consumers, and
Page 53 and 54: 72 Part '2 Producers, Consumers, an
Page 65 and 66: --------~ 96 Part 2 Producers, Cons
Page 67 and 68: 100 Part 2 Producers, Consumers, an
Page 85 and 86: 1136 Part 2 Producers, Consumers, a
Page 87 and 88: Part 2 Producers, Consumers, and Co
Page 89 and 90: 144 Part:2 Producers, Consumers, an
Page 91 and 92: - O far, we have assumed that price
Page 93 and 94:
152 Part 2 Producers, Consumers, an
Page 95 and 96:
Page 97 and 98:
160 Part:2 Producers, Consumers, an
Page 99 and 100:
Page 101 and 102:
Page 103 and 104:
1172 Part 2 Producers, Consumers, a
Page 105 and 106:
Page 107 and 108:
Page 109 and 110:
Page 111 and 112:
88 Part 2 Producers, Consumers, and
Page 113 and 114:
Page 115 and 116:
Page 117 and 118:
Page 119 and 120:
Page 121 and 122:
5 :; 208 Part 2 Producers, Consumer
Page 123 and 124:
$ 212 Part 2 Producers, Consumers,
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Page 137 and 138:
Page 139 and 140:
Page 141 and 142:
Page 143 and 144:
Page 145 and 146:
Page 147 and 148:
Page 149 and 150:
Page 151 and 152:
Page 153 and 154:
Page 155 and 156:
Page 157 and 158:
Page 159 and 160:
Page 161 and 162:
Page 163 and 164:
Page 165 and 166:
Page 167 and 168:
Page 169 and 170:
Page 171 and 172:
Page 173 and 174:
Page 175 and 176:
Page 177 and 178:
Page 179 and 180:
F PART 3 examines a broad range of
Page 181 and 182:
I I n a perfectly competitive marke
Page 183 and 184:
Price Dollars per 7 I Unit of Outpu
Page 185 and 186:
334 Part 3 Market Structure and Com
Page 187 and 188:
Page 189 and 190:
Page 191 and 192:
Page 193 and 194:
Page 195 and 196:
Page 197 and 198:
Page 199 and 200:
show all

Daniel l. Rubinfeld

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?