The demand and supply of crude oil per day in the world market in 2003 are given

Question

The demand and supply of crude oil per day in the world market in 2003 are given by: Q=85-0.4P and Q=55+ 0.6 P. Where quantity is in millions of barrels of crude oil and the price is in dollars. Answer the Following Questions: a. Which equation represents the demand and which equation represents the supply? The demand is: ____________________. The Supply is: _____________________. b. Graph the supply and demand model? c. What is equilibrium point? d. What happens in the market if the price is $35, and $25? e. Prior to the invasion of Iraq by the United States, Iraq was producing 2.5 Million barrel of crude oil per day and the invasion completely stopped the Iraqi oil production of crude oil. Based on the above model and information, what do you think happened to the quantity and price of crude oil at equilibrium? Show that algebraically. f. Graph the scenario in part (e) above on the supply and demand graph you have in part (b).

Explanation / Answer

e. There was a sudden drop of 2.5 million in supply, but the demand remain unchanged.

Before invasion:

Demand = Supply

85-0.4P = 55+0.6P

P=$150

So demand=supply=85-0.4P = 25 million barrels

Now, the supply suddenly dropped by 2.5 (so new supply = 22.5)

There is now a deficit in supply and so the prices will rise so that demand = supply condition is met.

new demand = 22.5 million barrels

85-0.4P = 22.5

P = $156.25

Note that the supply condition (Q=55+0.6P) is not met at this price, but this is only a temporary equilibrium owing to the unstable situation in Iraq.

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