22 July 2014

Managerial
Economics
Assignment 2:
Practical approach to
demand supply
schedule
By:-
Aditi Bhattacharjee(2014014)
Amandeep Singh(2014029)
Ankesh Chandra (2014043)
Chinmay Attre(2014333)

22 July 2014

Assignment Managerial Economics

Commodity Selected: WTI Crude
Graphs used:
1. Inventory vs Time graph from CME at NYME
2. Price vs Time graph
I have analysed the data on the basis of above two graphs. Before going to figures a brief
about understanding the theory behind interpretation.
Decreasing crude oil stock :-
For understanding the demand supply behaviour of crude oil market, it is a better choice to
look for the crude oil stocks or reserves in a country. If the crude oil stock is decreasing in a
country then it is a primary indicator that the supply side is not able to provide enough so as
to match with the demand. This results in rise of crude oil prices.
Once there is a rise in the price of crude oils, there is a rise in the prices of finished oil
products like lubes, gasoline and diesel. This rise in the fuel prices in turn affects the sales of
automobiles in the country in a negative way. It showed a perfect example of Cross-Elasticity
of demand. And, not only automobile sector, transportation industry also gets affected by it
as there comes an increase in the airfare prices, freight charges and other modes of transport.
This further results in increase of prices of various goods because transportation charges have
increased. Thus creating a bottleneck and contributing to the rise in inflation.
Increasing crude oil stock :-
On the other hand, if the crude oil stocks are increasing then it generally means that demand
for the oil products have gone down while the supply side has remained same. This results in
reduction in the prices of crude oil.



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Now, from the price graph it is clearly evident that the WTI crude oil price has increased for
august orders. WTI for august delivery has gained by as much as $1.55 coming out to
$102.75 a barrel in New York Mercantile Exchange, which is actually highest since 11
th
july.
Now this decrease in crude stock can be a short term gain for the stock prices of WTI which
is indeed showing an incremental up. On 17
th
July crude stockpiles in US shrank by almost
7.5 billion barrels. This coupled with the geopolitical disturbances in Iraq, Libya & Gaza has
resulted in an increased crude price for august deliveries, resulting in a gain for WTI.
Here the effect of governmental policies on the supply side is quite evident. Libyan
government restricting the oil supply has partly resulted in decreasing stockpile of US crude
stock which has in turn resulted in an increase in WTI crude which is sourced out from
Midwest and Gulf Coast regions in US.
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While referring to the month of June, it can be inferred that the prices of WTI crude were on
a trend of increase. The main reason for this was geopolitical disturbance in the Iraq region.
As the market was in a dilemma that this disturbance might affect the supplies of crude from
Iraq in a negative manner.
But, during the end of June, as soon as it was confirmed that Iraqi insurgents have failed to
advance the prices of crude stabilised. Now, after that prices continued to fall back towards
the annual average till the time there was another negative news in relation to oil industry.
More suspected violence in Libya has again resulted in the price rise of crude till date.
So, from above examples it is quite evident that supply has an impact on the prices of
commodity. Simply, by the fear of supply disruption, WTI crude oil prices jumped. While as
soon as there was a confirmation that supply will be normal, prices started coming back to
normal.
So, the change in crude stock of a country can be an important marker of the demand-supply
schedule of crude oil in that country.


Theory
Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among different people. The subject explores the behaviour
of the financial markets that includes interest rates as well as stock prices, examines the
reasons behind why some countries are rich and some are poor and how their economies can
be raised, studies business cycles along with the impact of inflation and unemployment and
how to come up with policies to combat these problems. Economics also studies the trends of
international trade and the repercussions of globalisation, looks at growths of various
developing countries and encourage ways to efficiently use resources, questions the
innumerable governmental policies and their capability to reach certain important goals like
full employment, fair distribution of resources and price stability. Hence, economics basically
is a very strong and relevant subject for the present and the future and for every individual at
some level.
Economics has some major wheels which keeps it running. Though it is broadly classified
into macroeconomics that looks at the economies of countries and the world as a whole and
microeconomics which looks at single entities like an entity or an individual company, but
scarcity, efficiency, demand and supply happen to be the four major conceptual pillars of
economics.
Scarcity is a universal phenomenon that will never cease to exist. Even when resources
increase and production increases, as a direct impact want of the population will also will
increase and hence scarcity will arise. Hence for this very reason, the concept of efficiency
22 July 2014

steps in. People need to use resources efficiently in order to increase productivity and
optimization needs to be done to get the most out of anything and everything.
The third concept is that of demand. Demand of a product is directly dependent on the price
of the commodity as shown in the figure below:

The curve is downward sloping as buyers tend to buy less when there is a rise in price (other
factors held constant). Both variables are inversely proportional.
The demand in quantity falls for two basic reasons:
1. Substitution effect: when price increases consumers tend to shift to other equivalent
products that fit their monetary capacity.
2. Income effect: when price increases and income remain the same, people find
themselves poorer.
The other factors that affect the demand curve are average income of the consumer, size of
the market, influence of related goods, preferences and tastes of the customer and
miscellaneous special influences.
Now there is a critical concept of movement along and shift in demand. A movement is said
to happen when there is a change in the quantity demanded, as this causes a point to move
along the curve. However, when factors other than the price of a commodity changes or
comes into play, then the demand curve is said to shift. The net effect of these changes causes
an increase or decrease in demand and hence the curve shifts.
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The supply is the last concept. Supply of a product or commodity basically shows the
relationship between the market price of the commodity and the amount of the commodity
that the producers are willing to manufacture and sell (other factors held constant). Here also
the quantity produced is directly affected by the price and vice versa as shown in the figure
below:

The other factors that influence the supply curve are, cost of production, technological
advances, price of inputs, price of related goods, government policies and other special
influences.
When changes in the factors other than the price of the commodity affect the quantity
supplied then it is generally a shift in the curve. The supply increases when the amount of
22 July 2014

commodity supplied increases at each market price. When sales decline due to a higher price,
then that causes a movement along the curve.
Apart from these four basic concepts, there is the concept of equilibrium. It is an elusive
concept and though it occurs in reality, it does so only for a very short span of time. Market
equilibrium happens when the quantity demanded equals the quantity supplied. At this stage
the price neither rises nor falls, however this is an ideal state and hence rarely realised.



Group Contribution:-
1. Ankesh and Amandeep contributed to WTI crude supply demand schedule.
2. Aditi and Chinmay contributed to theory part of demand & supply.