Microeconomics Before Referencing Microeconomics Questions What Market

Microeconomics Before Referencing

Microeconomics Questions

What market structure exists for countries that are suppliers of oil in the global economy and how this is helping to cause high oil prices?

The supply of oil is largely regulated by OPEC, a cartel or oligopoly of suppliers. "The producers' cartel OPEC accounts for about half of the world's crude oil exports and attempts to keep prices roughly where it wants them by trimming or lifting supplies to the market" ("Why are oil prices so high," 2004, BBC News). The OPEC cartel is characterized by almost all of the major economic elements of an oligopoly, including interdependence of the member countries, in which each oligopolistic nation carefully monitors the activities of other nations, to keep costs down. There is rigid control over prices, to keep prices up, as in a perfectly competitive market that is not advantageous to sellers, more independent competitors are likely to match price decreases, but not price increases. There is also collusion, in which the nations engage in secret or in this case open price, controls over production, to set a monopolistic price. The producers also produce a limited quantity, and allocate resources as inefficiently as a monopoly. The reason oil-producing nations can do this as a cartel is because oil is a finite resource that is in great demand for all industrialized nations but not present in all nations on a level to meet such demand ("Oligopoly," 2000, AmosWEB).

Governments gear up their economies to produce war material to fight WWII

The federal government was concerned about converting American industries to enter World War II. It mandated that major industries like automakers convert to aircraft production and shipbuilders create military crafts. Preparing non-military laborers to enter military production facilities, like women workers who had never worked in heavy industry before or scientists in civil occupations to produce designs for military technology was critical. Shifting consumer consumption patterns away from goods largely obtained from enemy nations was important, as was to ration essential items like meat, sugar, and bread. Other goods, like metal-based goods, fabrics used in manufacturing were also limited or prohibited for domestic consumption. This was to ensure everyone had an adequate supply of high-demand necessities, and that the highest-priority was given to troops for certain materials. Prince controls on limited-supply goods for consumers or goods critical to the war effort were instated to prevent price gouging, as price goes up as demand goes up, especially if goods are scarce (Tassava, 2008).

Why has the demand for oil risen dramatically in the last 2-3 years?

The demand for oil in the developing world, particularly India and China, has risen rapidly. In 2003, Chinese demand for oil alone increased 20%. U.S. demand increased because of the post-2001 economic recovery and the increased demand for large, gas-guzzling SUVs on the part of U.S. consumers ("Why are oil prices so high," 2004, BBC News). Supplies are also lower, as this spike was not forecast, giving OPEC no time to replenish its supply, as it had historically done in the past, during seasonal periods of lower oil consumption. Politically, OPEC is now acting more aggressively, announcing production cuts to pre-empt any weakening in prices. Hedge funds and speculators saw this, and combined with the increased violence in the Middle East, their economic activities have also driven up prices ("Why are oil prices so high," 2004, BBC News).

Only if companies, whether private companies, companies or in conjunction with the U.S. government, create new technologies, such as hybrid cars and wind and solar energy, that circumvent the need for oil from hostile nations can oil consumption be reduced. Through tax credits to consumers and energy-friendly companies, the government can also encourage reduced energy consumption through more energy-efficient light bulbs and heating devices.

The U.S. economy is now going into a recession.