Daniel l. Rubinfeld

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\