Archive forproducer surplus

Decline in World Prices for Oil

http://www.economist.com/news/business/21623694-price-oil-has-been-tumbling-cost-finding-it-has-not-unsustainable-energy

As this article explains, the worldwide oil market is currently experiencing a significant decline in prices. Part of the decline is linked to the slowing rate of economic expansion in China and Europe, meaning that people living there have less disposable income to spend on gas. This results in a decrease in demand, or, on an economic model, a leftward shift of the demand curve. There is also a much greater supply of oil, particularly in America. Domestically, this shifts the supply curve to the right. For other oil producing countries, this means another leftward shift in demand.

 

For the overall market, the leftward shift of the demand curve and simultaneous rightward shift in the supply curve creates a surplus. Saudi Arabian suppliers are attempting to reach equilibrium in the market by cutting prices. However, while Saudi Arabia’s market can afford to be relatively elastic, many producers have invested in projects to increase the supply of oil in response to expectations of higher prices in the future. In the long term, producers are likely to invest money in other areas and eventually decrease the supply, but for the time being, the surplus only continues to rise. In all, consumers are better off thanks to lower prices. However, producers stand to lose a lot of money, as the oil they invested trillions of dollars into producing is being sold at ever-lower prices.

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Producer surplus=New Firms

Today is class we learned about producer and consumer surplus. One key point I remember is when the producer surplus is large, which means producers gain from the exchange. When producer surplus is large, it attacks new entrepreneurs to enter the firm, because they know that they can create a company similar to the company making the profit. What the new company will do is create a similar product and charge a price a little low than what the consumers are used too, this will attract all the customers.

This idea relates to the article I posted In this article, it explains the profits that shaving companies make, like Gillette. The profits are incredible, and the market is a 6.1 billion dollar economy. This opportunity striked the interest of Michael Dublin who invented Dollar Shave Club. He charges a minimal monthly fee, and they send you raizers every month. This company attracted the attention right away from many consumers, and they are doing revenues of 50 million to date. This is a perfect example of what we learned with consumer surplus, and Dollar Shave club saw an opportunity within the producer surplus, and created this company.

Enjoy the Article!!!

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