Explain Causes
of Recent Fluctuation and
Longer Term Increases in the Price of Oil
Introduction
“Thank you for inviting me!” Tom Meyer
Your topic may very well be your final examination essay in your economics
course.
I intend to help you write that essay, and I have 20 minutes to help you.
_______
After studying the accompanying paper, consider how you might answer the
following questions:
Will we ever run out of oil? If so, are we doomed? If not, why not? Use your
understanding of economic principles and the Google search engine to analyze
American sources of energy. Explain how possible prices per btu (British
thermal unit) in alternatives like solar, wind, coal, or oil can guide you to
your answers.
Style your own paper like the sample I have included. When you are finished, remember that you heard it from me …
Guidelines for Essay Writing
Use an introduction, body, and conclusion to provide organization and direction
to your paper. Then use this checklist to refine and revise your efforts.
Introduction
Frame your question.
Framing the question influences the answer. You want to ask the question in
such a way as to get an answer back that satisfies your need.
State your thesis, or theme of your paper at
the outset, as quickly, as briefly, and as precisely as possible in the first
paragraph beneath your title. Underline or italicize your theme
statement.
Personalize your paper so that your reader
can relate to you, but make certain to
direct your reader’s immediate attention to the
importance of the issue.
Body
Limit your topic!
You can do this is several ways:
This means
create an outline for your paper.
Choose two or three main points; then search
for ways to
illustrate what you want to say that will
capture the imagination and interest of your reader. Think carefully about what
your audience can comprehend.
Write in a style that is meaningful for your audience. You will write in an
unsophisticated style if you are presenting your paper for eighth graders; and
you will write at a higher level if you are presenting your paper to the
sophomore class at Henry Ford Community College.
By outlining your process before you begin, you organize the body of your paper,
and, you give yourself the ingredients of your summary to the paper.
Constrain your written efforts to fit within the limits set by your
instructor.
Instructors don’t want excessive amounts to read.
If you are restricted to a number of pages, and to font size, and to single
or double-spacing, be sure to comply.
Conclusion
A well
organized paper contains the evidence necessary to support its conclusion.
Having told the audience what your thesis or theme was at the outset, you have
carefully provided the amplifying details within the body.
Now is the
time to summarize.
Re-state the theme of your paper.
Repeat your two or three main points.
Assert that your illustrations have led you
to your findings.
Suggested Title:
An Explanation of Recent
Fluctuation
and Longer Term Increases in the Price of Oil
Suggested
Introduction:
While driving to Henry Ford Community College I noticed that the price of
gasoline varied from $2.21 to $2.29 per gallon on Tuesday. Gasoline prices have
broken the $3.00 mark, and that scares me because my budget does not easily
accommodate $3 per gallon gasoline. So this essay tries to describe why gas
prices fluctuate within Dearborn, and what influences the long term rise in the
price of oil.
Body:
In a nutshell, the answer
to both my concerns is the same. Supply and demand influence price
fluctuations on an hour-by-hour basis as well as the long term trend in the
price of oil! So this paper has five objectives:
1. It explains demand and supply and illustrates them using graphs in its
appendices.
2. It uses the notion of surpluses and shortages to discuss how prices converge
to a single price, often called the equilibrium price.
3. It provides reference to a set of factors which increase demand, that is,
which shift the demand curve to the right on its graph, thereby increasing
price.
4. It provides reference to a set of factors which decrease supply, that is,
which shift the supply curve to the left on its graph, thereby increasing price.
5. Finally, this paper presents the math for finding equilibrium price when
slopes and intercepts of demand and supply curves are known.
Economics class is the best possible place to learn what supply and demand are.
Objective #1
Demand expresses the willingness and ability of buyers to purchase gas, and at lower prices, people buy stop taking taxi cabs, riding buses, or flying airplanes and buy and put more gas in the gas tanks of their cars.
When other influences on gasoline purchases are unchanging, a Law of Demand for gasoline can be clearly graphed as I can show in my appendix (or at the whiteboard in the classroom). It specifies the exact theoretical quantities which buyers acting together purchase at each price per gallon of gasoline when buyers pull into their filling station. In the short term, demand curves are very steep or nearly vertical (what economists call inelastic) because people have no time to search for better alternatives. In the long term, demand curves become increasingly flatter or horizontal (what economists call elastic) because people have time to search for better alternatives.
Supply expresses the willingness and ability of sellers to bring gasoline to the pumps. Filling station owners will make every effort to keep those pumps supplied when the price per gallon is higher, (because its profitable!) but will not be motivated to sell as much gasoline at lower prices (and smaller profits).
When other influences on gasoline purchases are unchanging, a Law of Supply for gasoline can be clearly graphed as I have also shown in my appendix. It specifies the exact theoretical quantities which sellers acting together can offer for sale at each price per gallon when buyers pull into their filling station. A supply curve is inelastic in the short term because firms have no time to search for alternatives. A supply curve is increasingly elastic in the long term as better alternatives are found or invented.
Objective #2
At prices higher than equilibrium price, quantity supplied exceeds quantity demanded creating a surplus of gas. Suppliers become unhappy with the presence of a surplus and get rid of it by agreeing to lower the price.
At prices lower than equilibrium price, quantity demanded exceed quantity supplies creating a shortage of gasoline. Buyers become discontented with the presence of a shortage and effectively move on to stations that are selling at higher prices.
Objective #3
The list of factors that
could increase demand are:
1. More buyers
2. Higher incomes
3. Reductions in the price of
insurance, tires or other
complements to gasoline.
4. Increases in the prices of
substitutes, such as the price of airline tickets, bus travel, or
taxicab fares.
5. Expected higher prices
tomorrow. (So buy today!)
Objective #4
The list of factors that
could reduce supply are:
1. Fewer sellers
2. Higher costs (such
as wages of drillers, deeper wells, higher shipping fees, or insurance, and more
expensive distillation machinery.)
3.
Reductions
in productivity or technology
(perhaps imposed by war).
4. Higher prices for
jet fuel (and other alternative
goods in production), making jet fuel production an even more profitable
use of a barrel of oil than for gas.
5. Bad weather
(delaying ships), war, & the
unforeseen
Objective #5
The algebra of a straight line called the
demand curve is D = a – bP. The D and the P are called variables and they
measure the amount of the quantity and price respectively. The lower case “a”
is called the intercept, and the lower case “b” is the slope of the demand
curve.
The algebra of a straight line called the supply curve is S = c + eP. The D
and the P are called variables once again, and they measure the amount of
quantity and price respectively. The lower case “c” is called the intercept,
and the lower case “e” is the slope of the supply curve.
Since equilibrium price occurs where demand and supply cross, we can say that
D =S. In algebra, that is the same as setting the right sides of each equation
equal to one anther.
Thus in equilibrium “a – bP” = “c + eP”.
Adding “bP” to both sides, and subtracting “c” from both sides results in:
“a – c = bP + eP”.
Factoring P from the
right side yields a – c = P (b + e).
|
Finally, dividing
both sides of the equation by “b + e” yields (a – c) / (b + e) = P* |
This is called a solution equation. A solution
equation has all lower case letters representing slopes and intercepts on the
left side of the equal sign, and only one capital letter standing for price on
the right side of the equal sign. The asterisk indicates that it is a solution
equation, and one of importance.
The solution equation tells us that equilibrium price is
the difference in the intercepts divided by the sum of the slopes of the demand
and supply curves.
Factors 1 through 5 that
increase demand increase the value of the letter “a.” Factors 1 through 5 that
decrease supply decrease the value of the letter “c.”
Factors that steepen the slopes of demand and supply (letters “b” and “e”) can
make the resulting price changes very much greater, and cause you alarm.
Factors that flatten the slopes of demand and supply make the resulting price
changes very much smaller, and leave you sleeping well at nights in your home.
Summary
I’ve said supply and demand explain both short and long run fluctuation in gas prices. We’ve explored the meaning and display of demand and supply curves in class. We’ve seen how prices converge on equilibrium price, called P*.
We know how to calculate an exact
equilibrium price using the algebra associated with straight lines representing
demand and supply curves.
We know the five factors increasing demand change the intercept of
the demand curve, and cause equilibrium price to rise,
We also know the other five factors decreasing supply change the intercept of
the supply curve, that also cause equilibrium price to rise.
Finally we know that steepening the slopes of both demand and supply by shortening the time horizon and eliminating the search for alternatives greatly increases the size of prices changes, causing a shock to your wallet when you approach the pump with an empty fuel gage and no more time to search for alternatives.
My thoughts, jottings,
and notes:
“Love for Econ Springs Eternal!”
Links to return to
page 1 Goals 1 and 2
page 2 How We Explain Short Term Influences on Price of Gas
page 3 How We Explain Long Term Influences on Price of Gas
page 4 How to Write A Paper
Tom Meyer's Instructor Homepage