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In economics, demand and supply are two main market forces that help to understand the price mechanism. The aim of this paper is to show how sound knowledge of these two concepts helped me in real life. In order to relate these concepts to a real-life scenario, Oil and natural gas industry has been taken into consideration. The emphasis is on understanding the market mechanism and how changes in demand and supply cause fluctuation in the price and quantity of the goods.
In economics, supply and demand are two market forces that help in determining market equilibrium. Demand can be understood as the quantity of a good that a consumer is willing and is capable fo buying at a particular price at a given period of time (Riley, n.d.b ). Supply can be understood as the units of a good that a producer is willing to and capable of supply in a market at a particle price on a particular time period (Riley, n.d.b ). Using these concepts, one can find the equilibrium price and quantity in the market. Equilibrium of supply and demand is a state of the market when demand for a product is equal to supply, at a particular price. At equilibrium quantity demanded is equal to quantity supplied. At the equilibrium price, the exact quantity that producers supplies to the market will be purchased by consumers and there will be no shortage or surplus in the market ( Khanacademy, n.d.).
I have selected the oil and natural gas industry to study the components of demand and supply. With increasing development, global energy demand is rising. In order to meet the growing needs of individuals, there is a rise in demand for oil and natural gas. Oil and natural gas are mainly used for transportation, heating, and electricity production (International Energy Agency, 2017).
Price and availability of other sources of energy: Price and availability of other sources of energy like solar, thermal, wind, water, and other renewable sources of energy impacts the decisions of the consumers.
Seasons: In the winter season, there is an increase in demand for heat-generating products while during summers there is an increase in demand for the cooling electronics. Thus, seasonality is also a factor that impacts the energy demand.
Changes in taste and preference of people: With a growing emphasis and rapid development of cleaner technology, there has been a shift from the conventional sources of energy to renewable sources of energy.
Amount of oil and natural gas production: The quantity of the oil and natural gas that is produced within the domestic frontiers and are imported from other countries.
Level of oil and natural gas in storage: The stock of Oil and natural gas available with the industry.
Technology: With the advancement in technology, there is an improvement in the extraction methods, this helps in increasing the supply of the good.
In the diagram given below, the x-axis (horizontal axis) represents the quantity demanded and the y-axis (vertical axis) represents the price of the good. Initially, the market for Oil and natural gas is in equilibrium at point E. The market equilibrium is achieved at the intersection of the demand curve (DD) and the supply curve (SS). The equilibrium price is P and the equilibrium quantity is Q.
However, with a surge in demand, the demand curve will shift rightward to DD1. The new equilibrium will be achieved at the point E1 which is the intersection point of the demand curve DD1 and the supply curve SS. The equilibrium price has risen from P to P1 and the Quantity has risen from Q to Q1. As we can see, the new equilibrium is achieved at a higher price and quantity, this can be attributed to the fact that when there is an excess of demand, there is a shortage. The competition among buyers will push the price in the upwards direction.
A surge in the supply of a good implies that the supply curve will shift to its right. The new supply curve is SS1. However, there is no shift in the demand curve. Therefore, the new equilibrium is attained at E1, where the supply curve (SS1) cuts the demand curve (DD). When there is a surge in supply curve, the supply curve will shift to its right and as a result of this change, the price falls and the quantity of the good will shoot up. This happened because when the supply rose there is a surplus of production or one can say extra supply in comparison to the demand, in order to prevent the storage of inventory or extra stock, companies will lessen the prices. As a result, the new equilibrium will be achieved at low price level and particularly, at a higher quantity. The price is deflated from P to P1 while the quantity rose from Q to Q1.
Currently, we are working towards sustainable development; hence the focus is now on efficient use of energy and stimulating the usage of cleaner and eco-friendly sources of energy production (Choi, Lee & Song, 2017). The emphasis of this industry is towards finding innovative ways to enhance the technology. As a result, it will lead to a surge in the supply methods, less pressure on resources and a reduction in cost, thereby, increasing the supply of the energy to meet the demand.
I have always dreaded from Economics, as I find things confusing and complicated. However, when these concepts once studied from the books, explained by the professor, and then were applied in real life, I could relate to this concept more. It felt like everything in the industry narrows down to the demand and supply mechanism.
Earlier, I had only the basic knowledge of these two concepts, however, when I did this analysis of the oil and natural gas industry, I can now understand how the changes in the demand and supply factors change the price of the oil and natural gas. With this, I can now better examine the economic situation and can see how the external factors impact this industry which, in turn, impacts the price, demand, and supply of the good.
Moreover, a sound understanding of this topic helped me to understand why there are shortages and surplus in the market. Furthermore, I am grateful to my professor who taught us this topic and elucidated each and every aspect of it. Now, it is no more confusing and now I am eager to study in-depth the other associated aspects.
Choi, Y. Lee, C. & Song, J. (2017). Review of renewable energy technologies utilized in the oil and gas industry. International Journal of Renewable Energy Research, 7 (2). https://www.researchgate.net/publication/317949875_Review_of_renewable_energy_technologies_utilized_in_the_oil_and_gas_industry
EIA. (n.d.) . Natural gas explained. Retrieved from https://www.eia.gov/energyexplained/natural-gas/factors-affecting-natural-gas-prices.php
International Energy Agency. (2017). World Energy Outlook, 2017: A world in transformation. Retrieved from iea.org/reports/world-energy-outlook-2017
Khanacademy (n.d.). Market equilibrium, disequilibrium, and changes in equilibrium. Retrieved from https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/market-equilibrium-disequilibrium-and-changes-in-equilibrium/a/lesson-summary-market-equilibrium-disequilibrium-and-changes-in-equilibrium
Riley, G. (n.d.a). Theory of demand. Retrieved from https://www.tutor2u.net/economics/reference/theory-of-demand
Riley, G. (n.d.b). Theory of supply. Retrieved from https://www.tutor2u.net/economics/reference/theory-of-supply
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