Give a brief description in words of what happens in the short run and long run in each scenario.
The price of oil plumments due to a trade agreement
In the short run, with the price of oil plummeting due to a trade agreement, there will be an immediate decrease in the cost of oil for businesses and consumers. This rapid decline in oil prices will likely lead to lower production costs for industries dependent on oil, such as transportation, manufacturing, and energy production. As a result, businesses may experience increased profitability and could potentially lower the prices of their products and services to attract more customers. Additionally, consumers may benefit from decreased fuel prices, leading to more affordable transportation and reduced costs for goods and services that rely on oil.
In the long run, the effects of plummeting oil prices due to a trade agreement may be more complex. While low oil prices can boost economic growth, it can also have negative consequences. In the long run, oil-producing countries could face significant economic challenges as their revenues heavily depend on oil exports. Governments in these countries might struggle to generate enough revenue to finance public services and infrastructural projects, leading to potential budget deficits and economic instability.
On the other side, low oil prices can also impact renewable energy industries negatively. With cheaper oil, there is less incentive for businesses and consumers to invest in alternative, sustainable energy sources. Therefore, the long-term impact of plummeting oil prices due to a trade agreement can involve a mix of advantages and disadvantages, affecting different sectors and economies in various ways.
In the short run:
1. As the price of oil plummets due to a trade agreement, there is an immediate surplus of oil in the market.
2. Oil producers may face temporary losses as they struggle to sell their oil at lower prices.
3. Consumers and businesses benefit from lower oil prices, as it reduces their energy costs and transportation expenses.
4. Industries heavily reliant on oil, such as transportation and manufacturing, may experience a boost in profitability due to reduced production costs.
5. In the short run, the decrease in oil prices may lead to increased economic activity, as consumers have more disposable income to spend on other goods and services.
In the long run:
1. As oil prices remain low due to the trade agreement, oil producers may reduce their production levels or even exit the market.
2. This decrease in production can lead to a decrease in the overall supply of oil in the long run.
3. The reduced supply of oil can eventually lead to a gradual increase in oil prices as demand remains constant or increases over time.
4. The higher oil prices in the long run may impact industries that are heavily dependent on oil, as their production costs rise again.
5. Furthermore, consumers and businesses that had initially benefited from lower oil prices in the short run may face higher energy and transportation costs in the long run.
6. Ultimately, in the long run, the equilibrium between supply and demand for oil will be reestablished, keeping in mind any ongoing effects of the trade agreement on oil production and consumption.
In the short run, when the price of oil plummets due to a trade agreement, there are several impacts on the economy.
Firstly, consumers benefit from lower oil prices in the form of lower fuel and energy costs. This translates into reduced transportation expenses, lower heating and electricity bills, and potentially lower costs for goods and services that rely on oil as an input.
Secondly, industries heavily reliant on oil, such as transportation and manufacturing, may experience an increase in profitability as their production costs decrease. This may lead to increased output and potentially job creation in these sectors.
However, in the long run, the scenario becomes more complex.
If the price decrease in oil is sustained, it can lead to various structural changes in the economy. This can include the development of alternative energy sources or a reduction in oil exploration and extraction activities. Consequently, this shift can have long-lasting effects on the employment landscape, as jobs in the oil industry may be affected.
Moreover, countries that heavily depend on oil exports for revenue, such as oil-producing nations, may face significant economic challenges in the long run. A prolonged decrease in oil prices can lead to reduced government revenues, budget deficits, and potential instabilities in those economies.
Overall, while a short-term drop in oil prices may have immediate benefits for consumers and certain industries, the long-term consequences can involve broader impacts on the economy and countries heavily dependent on oil revenues.