In 2014, oil prices plunged to a historical low. Despite weak economic activities worldwide, there has been an increase in activities to produce oil which is a time-consuming process.
Discuss how these events are likely to impact the market for oil and its related markets.
Source: 2016 NJC Prelims H2 Economics
How can we approach the question?
Clarify ‘impact on any market’ to be how the equilibrium price and equilibrium quantity transacted will be affected by the given events in the preamble.
Next, state the use of the demand and supply economic framework, with relevant elasticity concepts to determine the equilibrium price and equilibrium quantity transacted.
Finally, the markets to be discussed in the essay will be the oil market and 2 other markets that are related to oil. What might those 2 markets be?
Steps to determine how the equilibrium price and equilibrium quantity will change in each market.
- Identify and explain the demand factor(s) from the preamble
- Since there is a change in demand, PES will be a relevant consideration. Hence, justify the PES value
- Identify and explain the supply factor(s) from the preamble
- Since there is a change in supply, PED will be a relevant consideration. Hence, justify the PED value
- Consider the relative shifts in demand and supply and come to a stand on the eventual change in equilibrium price and equilibrium quantity.
- Combine the effects and illustrate onto one demand and supply diagram.
- For evaluation, examine the ceteris paribus condition.
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