Demand and Supply

Demand and Supply

If Demand increases and supply remains unchanged, a shortage occurs,

leading to a higher price.

If Demand decreases and supply remains unchanged, a surplus occurs,

leading to a lower price.

Supply

If Supply increases and demand remains unchanged, a surplus occurs,

leading to a lower price.

If Supply decreases and demand remains unchanged, a shortage occurs, leading to a higher price.

In this powerpoint, you'll discover the effect of the changing relationship between demand and supply on prices.

One example is oil prices.

Back in June 2014, the price of crude oil was up around $115 per barrel.As of January 5, 2015, it had fallen by 50% down to $52 per barrel.

But why does the price of oil keep falling?

Demand and Supply

Table

Why has the Price of Oil Fallen?

On The Demand Side,• The economies of Europe have weakened due to

recession and therefore are demanding less oil.• People are becoming more environmentally

aware.• Vehicles are becoming more energy-efficient, so

demand for fuel is falling.• In China the demand for oil has fallen due to use

of alternatives.

Why has the Price of Oil Fallen?

On the Supply Side• United States domestic production has nearly

doubled over the last six years.• Saudi, Nigerian and Algerian oil that once found

a home in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices.

• OPEC has not intervened to curb production and stabilise price.

Benefits of falling oil prices

• Households will spend less on energy this year because of the lower oil prices.

• Any motorist can tell you fuel prices have dropped considerably in recent months.

• The fall should lead to lower prices all around.

Negative effects

• Oil producing countries, however, will suffer as the prices continue to drop.

• Some smaller oil companies that are in debt may go out of business, which in turn will pressure banks that had to lend to them.

• It is also contributing to deflation.

Conclusion

We can now see that the relationship between supply and demand can have a huge effect on prices and

therefore on every part of the economy.