what happened in long run & Short run when the oil price rises?

Assume the econoly is in equilibiruim. Using the Aggregate supply and demand curve illustrate the short run and long run effects of an increase in oil price for a certain economy.

3 Responses to “what happened in long run & Short run when the oil price rises?”

  1. Dan E Says:

    When oil is an abundant commodity with out fear of supply disruptions supply out paces demand and therefore leads to lower prices. As fears of supply disruptions and diminishing supplies enter the equation pricing.

    In an oil based economy that was in a state of equilibrium adverse factors take hold leading to inflationary pressures including but not limited to everything from material costs,manufacturing costs, shipping costs and other transportation costs, to shrinking household budgets as a result of increased home energy pricing. As this happens pricing on once cost prohibitive means of producing energy begin to become more competitive leading to increased innovation in lesser accepted modes of energy production ie. renewable’s, nuclear and hydrogen based technologies as in fuel cells. Ultimately due to market conditions a new economy will begin to unfold and I’d bet on a hydrogen based economy within 50 years.

  2. Giggly Giraffe Says:

    Oil prices are not a model in Economic Statistics and believed to be a "lagging" effect.

    As a "Lagging" effect, in the short run demand has been going up. This is contrary to "Text" book answers of higher prices decrease demand … but it’s what’s actually happening. In the long – run the price will cause an inflation cost which will rise interst rates, and corporations should increase costs of good & services, which will cause an increase in employee wages.

  3. bookish Says:

    Inflation in the short run. Which means the costs of production rise and prices rise, consumption of non-essentials decrease, inventories rise, borrowing expands which can create interest rate pressure. How the govenrment reacts to that interest rate pressure will influence how quickly the economy returns to equilibrium.

    In the long run it makes other fuels/production methods more cost effective leading to technology shifts. Also how wisely the government, industry and banking react to this pressure will lay the track for a new stronger more diverse economy or a stagnant one.

    Example, the sins of the 70’s have come back to haunt us. We used the 80’s and 90’s to build gas guzzling SUV’s rather than using those two decades to fund alternative energies for cars with a smaller footprint.