This is really long but i really need help!! THX
In 1973, there was a war between some arab countries and Israel. Many western countries wanted to help Israel. Some arab oil exporting countries have reacted by cutting oil exports to those countries. Prices went up. The prices remained high during the following years. They have started to decrease in the 80s and in 1986 they reached very low levels.
1.Why the prices went up? (show on a graph the effect of the political events on the equilibrium price; was this an effect of the demand or supply? Show the supply and demand before and after the embargo)
2.What do you think about the elasticity of demand for oil in the following days or months of the embargo? Why those countries were badly affected by the embargo the following months of that event?
3.Assume that supply didn’t increase (the same as during the embargo). After some years, prices went down; explain how could this happen using a graph and comment briefly on your graph (show what happened to the supply and demand and explain why and how this induced such low prices in the 80s?
1. To understand why the prices went up during the Arab-Israeli War in 1973, you need to analyze the effect on the equilibrium price. The equilibrium price is determined by the intersection of supply and demand in a market. In this case, the oil market was affected by political events.
Before the war, the supply and demand for oil were relatively stable. However, with the outbreak of war, many western countries decided to support Israel, which led to an increase in demand for oil. This increase in demand caused a rightward shift in the demand curve, resulting in a higher equilibrium price.
Additionally, some Arab countries, as a form of protest and retaliation, decided to cut their oil exports to those countries supporting Israel. This action reduced the supply of oil in those countries, causing a leftward shift in the supply curve. The combination of increased demand and reduced supply further pushed up the equilibrium price.
To show this on a graph, you would need to plot the supply and demand curves before and after the embargo. Before the war, the supply and demand curves would intersect at a certain equilibrium price. After the embargo, the supply curve would shift to the left, and the demand curve would shift to the right, resulting in a higher equilibrium price.
2. The elasticity of demand for oil refers to how responsive the quantity demanded is to changes in price. In the following days or months of the embargo, it is likely that the demand for oil would be inelastic. This means that the quantity demanded would not change significantly despite the increase in price.
Countries that heavily depended on oil imports would be more affected by the embargo because their demand for oil would be relatively unresponsive, or inelastic, to price changes. They would have limited alternatives to obtain oil from other sources, making it difficult for them to reduce their demand even as prices went up.
3. In the 1980s, the oil market experienced a decrease in prices. To explain this phenomenon, you can analyze the changes in supply and demand.
It is assumed that the supply of oil did not increase, meaning the supply curve remained relatively stable. However, the demand for oil started to decrease over the years. This could be attributed to various factors such as improvements in energy efficiency, the development of alternative energy sources, and economic changes.
To illustrate this on a graph, you would need to show a rightward shift in the demand curve, indicating a decrease in demand. The combination of stable supply and declining demand would result in a lower equilibrium price.
It is important to note that this is a simplified explanation, and other factors such as geopolitical events, technological advancements, and economic conditions can also influence oil prices.