Analysis of the trends in the consumption patterns of oil Essay

Analysis of the trends in the consumption patterns of oil - Essay Example The definition of Economics can be classified into three broad categories, namely: (a) Wealth Economics Definition, (b) Material Welfare Economics Definition, and, (c) Scarcity Economics Definition. Of these three, the Scarcity Economics Definition is the pertinent for the present. According to this, economics is a â€Å"science which studies human behavior as a relationship between ends and means which have alternative uses† (Robbins, 1935). The study of Economics is divided by the modern economists into two parts, namely; microeconomics and macroeconomics. In macroeconomics, the economy as a whole is analyzed, while microeconomics analyses the economy in terms of its innumerable decision-making units. Microeconomics: The study of supply and demand inside a market is known as microeconomics. Microeconomics is â€Å"the study of particular firms, particular households, individual prices, wage incomes, individual industries, and particular commodities† (Boulding, 1969). Microeconomics offers solution for the problems: what should be produced, how those goods and services should be produced, and, who is allowed to consume those goods and services. It explains the composition of total production- why more of some things is produced than of others. In other words, it analyzes demand and supply for a product or service. The law of demand states that â€Å"a rise in the price of a commodity or service is followed by a reduction in demand, and a fall in price is followed by an increase in demand, if conditions of demand remain constant† (Samuelson, 1962). ... The major factors that influence the demand for a product or service are: price and availability of a substitute good, price and availability of a complimentary good, income, tastes and preferences, price expectations, stock of goods in consumer hands, and, population. Law of supply: Supply is the amount offered for sale at a given price. The law of supply states that "other things remaining the same, as the price of a commodity rises its supply is extended, and as the price falls its supply is contracted" (Boulding, 1969). The supply changes due to: i) costs of production, ii) unavailability of resources (like raw materials for the production), iii) improvement in the means of transportation, communication and technology, iv) political disturbances or war, and, v) the climate, irrigation methods and soil (in the case of agriculture products). Trends in the consumption patterns of oil The availability of oil and its price are linked by the laws of supply and demand. Each day approximately 84 million barrels of oil are extracted from the earth, and approximately the same amount is consumed. The world's rate of oil extraction will begin soon or has already begun to decline, while the demand for oil continues to grow which in turn will produce sharply rising prices for oil. In this study, the Oil Market Report by IEA dated 10th July, 2008 (IEA, 2008) is analyzed. The highlights of the analysis are given below: Microeconomics of oil - Supply and Demand: The oil market is one where small changes to the supply or demand cause large changes to the clearing price. In economics jargon, both oil supply and demand are "inelastic" - they show only a minimal short-term response to changes in