Summary
The article is about the current price rise of crude oil to $100 per barrel and it forecasts the price of the oil using key determinants. The article discusses the law of supply and states the existing scenario of oil prices is an exception to the case. Then the article explains the transition of oil prices from Buyers market to Sellers market. Then the basis of pricing in each market is discussed. The demand-supply gap is then discussed. In a sellers market, pricing of oil is done through three main aspects viz- Value of equivalent human energy, Sustainable energy creation costs, Affordability of the least rich marginal consumer. The discussion then shifts to US perspective where in the price of the oil is determined to a great extent by the Americans. Nearly 25% of the world oil supplies are consumed by USA. The article concludes by stating that the price of the crude oil may go up to $200 per barrel in the coming years.
Primary Economics Elements
The article analyses the change in demand and supply markets due to the price rise. The article involves a price hike. The impacts of this hike are discussed with diagrams.
Output markets
SUPPLY DEMAND
Firms Households
DEMAND SUPPLY
Input markets
Circular flow of Economic Activity
The demand in the output markets are determined by the households from the above diagram. A household’s decision about what quantity of a particular product depends upon the following factors and all the factors are getting affected due to the price hike.
The Essay on Construction Materials Price Market Demand
In the article 'Censoring Pleas for Help', Dwight R. Lee talks about government price controls. The author likens government price controls to government censorship, arguing prices are how markets communicate with one another. The example used to demonstrate this point is the price regulations the government enforces after a natural disaster, freezing prices on such items as labor, construction ...
1. The Price of the product. In this article, the price of the product is the major issue. The price of 1 barrel of oil is raised to $100.
2. The income available to the household
A household’s income is the sum of all the wages, salaries, profits, interest payments, rents and other forms of earnings received by the household in a given period of time.
The price rise is going to increase the expenses and less the savings.
3. The Household’s amount of accumulated wealth
Wealth is the total value of what a household owns less what it owes. It is the amount left after a household sells off all its possessions and pays off all its debts.
4. The Prices of other products available in the market
Other products include substitutes (Solar power, Electric Battery, Wind power etc.) and complementary goods (Cars and Automobiles etc.).
Due to this price rise, the prices of these substitutes and complementary goods will remain affected. Substitutes, a favourable condition exists and for complementary goods, the condition worsens.
5. The households’ tastes and preferences will change.
6. The household’s expectations about future income, wealth and prices also will change.
Ultimately, the law of demand – “As price rises, quantity demanded decreases and vice versa” will play a crucial role in decision making by the household’s.
World Price
80 10
Quantity (Barrels)
Oil Pricing before Price hike
As per this graph, the pricing of oil is having an impact on producers and consumers. The producers/suppliers price the oil as per the law of supply in early 2000’s where the oil market was a buyers market. The basis of pricing was cost of production of the least efficient marginal supplier.
World Price
100 15
Quantity (Barrels)
The Essay on Live Hog Market Cost Prices
Several factors including increased supply have caused declining prices for live hogs on the spot market. Also as shown bellow futures prices will remain below the carrying cost for live hogs until nearly the end of the fiscal year. However processed pork products such as bacon, loins, and ham remain above the current cost of production. Three Little Pigs Inc. is capable of processing hogs into ...
Oil Pricing after Price hike
As per this graph, the pricing of oil is having an impact on producers and consumers in the perspective of price hike. The producers/suppliers price the oil on three major components where the oil market is now a sellers market. The basis of pricing is based on three components like Value of equivalent human energy, Sustainable energy creation costs, Affordability of the least rich marginal consumer.
IMPACT ON AIRLINE COST AND PRICING DECISIONS
The Oil prices hitting about $100 per barrel makes a huge alarm in the airline market. Nowadays airline owners are slowly switching over to use natural gas. A discussion of the economies
Economies of scale include the factors of production like
Indivisible Fixed Costs
The cost of inputs cannot be scaled down below a minimum level in the case of car production. The airline manufacturing is a highly capital intensive one.
Specialisation
An airline production line has various specialized departments like shaping, moulding, assembling etc.
Purchasing
Large orders may cost less because of suppliers accept lower prices to secure steady demand, customers exploit market power
Research and Development
The major focus is on technological improvement in the airline market.
CONSUMER IMPACT – ELASTICITIES
Own Price Elasticity
• Own Price Elasticity:
-ve ______ -1 ________0 _____________ +ve
elastic inelastic ‘Gifffen good’
For Airlines, there is an elastic demand. As quantity increases, the price of the product also increases. Nowadays, it is getting transformed into perfectly elastic.
Income Elasticity
• Income Elasticity:
-ve ____________ 0 __________ 1 _______ +ve
inferior goods necessities luxuries
Airlines will come under the category of luxuries but now with the increase of low cost Airlines, it will become a necessity.
Cross Elasticity
• Cross Price Elasticity:
-ve _____________ 0 __________ +ve
complements substitutes
Considering the complements, Airlines have a negative elasticity and regarding the substitutes also is negative.
The Essay on Price Elasticity Of Demand 2
Supply and demand plays a vital role in the economy. Price is the central determinant of both the demand and supply, for example the higher the price of a good or a service the less the product is demanded. In circumstance where the price goes down, demand increases. The response of price and quantity demanded create an inverse relationship between the two. Whereas demand portrays the consumer ...
COMPETITORS REACTION
The competitors include the trains and buses.
The reaction from the side of trains is introduction of luxurious coaches and drastic reduction in the travel fare.
The same price cut can be seen in the case of buses also. Nowadays buses also provide sleeping coaches.
For all the reactions, Airline has only the time advantage.
FACTORS DRIVING DEMAND
Income
Income is an important factor to be considered regarding air travel. Higher the income, better it is for the airline market. Air travel is a luxurious product and nowadays low budget airlines are becoming more popular. This is going to create a separate customer market between train commuters and the Business class travel.
Since Air travel is now available at a lower cost all the factors change. This will create a move of the whole curve (a change in the level of demand).
Distribution of Income and Population
This factor is a crucial one for the marketer to position the market and segment it. Demand for any product will almost certainly depend upon the distribution of the population and of income, across age groups, classes and regions. In the case of Airlines, London is considered to be a high income area. Marketers must now target this area to sell high quality high priced Airlines. Similarly, marketers must target different areas according to the income level for different budget Airlines.
The Price of Substitutes
This is again another important factor. The substitutes have a great impact on the sales of Airlines. Once there is a threat of terrorist attack in the trains, then the sales of Airlines would pick up as it happened recently in London rail bombings. Similarly a price or fare cut in buses and trains can have a drastic negative impact on the airline market.
The Price of Complements
This factor is a serious issue as the complement product of Airlines is petrol or gas. Recently, the price of a barrel of oil has hit $100. This indicates that the maintenance cost of Airlines is going to raise and also the running cost. The variable cost will be an issue to watch out while purchasing Airlines and this may lead to the fall in airline sales drastically.
The Essay on Elasticity Of Demand Price Income Good
Price elasticity of demand is defined as how demand changes as a result of a change in price. It can be said that if a reduction in price leads to an increase in demand then demand is relatively elastic. Elasticity is usually negative. There is an alternative scenario where demand will increase as price does so too. This happens only in the case of Giff en goods, where elasticity is positive. The ...
IMPACT OF TECHNOLOGY ON THE MARKET FOR AIRLINES
Technological progress forces the average cost curve to fall. Such progress includes human capital i.e. the skills and knowledge contained in people. Technological progress has been the principal engine for economic progress. In Airlines, technology plays a major role contributing to the economy as a whole. HCL is a major player in developing software for the airline market. They have Airbus and Boeing as their major clients.
Conclusion
The Sellers market will have a drastic impact all over the world. The Demand-supply gap in a buyers market is that demand will be lower than the supply for most parts. In a sellers market, demand will be higher than supply and recessions would indeed cause demand to fall. This is the real scenario that now exists in the U.S.A. The rule of the Thumb is when the demand tries to go beyond the supply line, there will be shortages. The future looks gloomier where the price of the oil may even go up to $300 per barrel. The substitute products must take full effect then.
Reference
David Beg, Damian Ward (2007), Economics for Beginners – 2nd Edition, McGraw-Hill
Karl. E. Case, Ray. C. Fair, “Principles of Economics”, Sixth Edition, Low Price Edition
Economic Times, January 2, 2008.
