Oil Soars above $70 a Barrel”
This article was published in the Wall Street Journal on Wednesday, November 5th. The article was found in the “Money and Investments” section on page “C9”.
Summary of article
This article talks about the recent increase in the price of Oil futures by 10% due to a cut in production by the infamous cartel OPEC. It also sheds light on the prices of other commodity futures including Gold and Copper, however our concern here relates only to the prices of crude oil futures.
Economic theory in article
As we have learned in chapters seven and eight that products that are inelastic help generate increased revenues for its sellers, as the decrease in quantity is not matched with the far larger increase in price. OPEC took advantage of the inelastic demand of crude oil futures using this exact principle. Also, illustrated here is the lack of substitutability of crude oil futures due to their inelasticity.
As studied in chapter 8, a leftward shift in the marginal cost curve due to an increase in marginal cost at each quantity produced causes a leftward shift in the supply curve. This is exactly what is happening with the production of crude oil, which in effect is directly related to crude oil futures. Thus, a cut in production of crude oil raises the marginal cost of producing each additional unit, causing the leftward shift of the supply curve, which increases the prices. In the case of the article this increase in prices was about 10%.
Now, having said that even though the article does not reveal the exact decrease in quantity demanded corresponding with the increase in the crude oil futures, according to the economic theory presented in chapters 7 and 8 the decrease in quantity should be less than ...