Answer to Question #186653 in Microeconomics for Bornface Kandunda

Question

The current world production of oil is 350 million barrels per day and the current world price of oil is N$850 per barrel. The price elasticity of demand (ε) is -0.3 and the elasticity of supply (η) is 0.1. Shiwa Investment is planning to enter the world oil market with a daily production of 13 million barrels of oil per day. For simplicity, assume that the supply and demand curves are linear Calculate market price and total supply of oil after Shiwa investment has enter the world oil market and explain why the total supply of oil increases with less than 13 million.

Answer 1

If a daily production increases by 13 million barrels of oil per day, then the supply will increase, the quantity demanded will decrease, and the market price will decrease by:(13/350)/0.3×850 = N$105.24 and become 850 - 105.24 = N$744.76.

The total supply of oil increases with less than 13 million, because some of suppliers decrease their output by some amount at lower market price.