Applications of Demand and Supply

Read this chapter and attempt the "Try It" exercises. This chapter will help you gain familiarity and competencies with regard to basic demand and supply concepts. At a minimum, you should be able to list the factors that shift the demand curve and those that shift the supply curve after completing these chapters. This will help you prepare for similar types of analyses in the units ahead.

4.1 Putting Demand and Supply to Work

Case in Point: The Great Recession, the Arab Spring, and the Oil Market

Oil markets have been on a roller coaster ride for the last few years. Even after the official start of the recession in the United States in December 2007, oil prices continued to climb, peaking in the summer of 2008 at over $130 per barrel. Although demand in the United States and Europe was already weakening, growth in the rest of the world, particularly in China and India, was still strong. Overall, demand was rising.

Oil prices dropped precipitously following the start of the financial crisis and the deepening of the recession in the fall of 2008. Within a few months, the price of oil had dropped to around $40 and was in the $70 to $80 range for much of the rest of 2009 and the first half of 2010.

The so-called Arab Spring actually began with demonstrations late in 2010 in Tunisia. They quickly spread to Egypt, Bahrain, Syria, Yemen, Algeria, Jordan, Morocco, and Yemen. There were demonstrations in Saudi Arabia, Kuwait, Lebanon, Mauritania, and Sudan. By the fall of 2011, the movement had toppled the regimes of Zine El Abidine Ben Ali in Tunisia, Hosni Mubarak in Egypt, and Muammar al-Gaddafi in Libya.

The movement had a large impact on oil prices as it raised questions about the security of oil supplies. The supply curve of oil shifted to the left, forcing the price upward. Not only were several key suppliers of oil affected, but at times the ability to transport oil through the Suez Canal was affected.

Oil prices rose to well over $100 per barrel by early 2011. They then began to subside again as some of the uprisings were subdued or ending, especially in the oil-rich Gulf countries. By the fall of 2011, oil prices had fallen about 20% as compared to earlier in the year.