International Baccalaureate Internal Assessment Economics HL
International markets are quite dynamic given that many demand and supply factors come into play in the determination of market prices. Countries depend on international markets to trade surplus commodities in an effort to earn incomes which are not only used to power economic development but also acquire goods and services these countries demand. Venezuela for instance, is a nation with huge oil and gas reserves and as such, has benefit from favorable international market prices for both oil and gas (Al Jazeera Media Network). This was especially the case when the international price for crude oil rose sharply after oil production in major oil producing countries like Iraq and Libya was disrupted.
Q1 Q2 Q3
Given that demand represents the quantity of a commodity that consumers desire to purchase at a particular price, the diagram (1) above shows that at low prices, consumers demand more. Conversely, when the price of a commodity is high, consumers tend to demand and subsequently purchase less.
Q1 Q2 Q3
Diagram 2. Showing law of supply where Q represents quantity and P represents price.
In line with the law of supply, the diagram (2) above shows that suppliers are always seeking to supply more when prices are most favorable, that is, at high prices so as to make most profits.
Presently, international oil prices at their lowest in a decade given that there is an oversupply of the commodity and more so, nations which once demanded high volumes of this resource are now self-sufficient. The US is indeed the largest consumer of crude oil and gas in the international markets. After it became able to produce its own crude oil from its own natural deposits, the prosperous nation has demanded less of the product from the international markets. As with any free market, the relationship between demand and supply affects the price of a particular commodity, in this case, crude oil.
The diagram (3) below shows equilibrium quantity and price where P is price and Q is quantity.
In a free market, the point for equilibrium is considered as one where there is optimum efficiency such that quantity of goods supplied tend to conform to the quantity demanded. At the point where the supply curve and the demand slope intersect represents the point of equilibrium which projects the ideal price of the commodity in a free market as well as the ideal quantity supplies should avail to such a market.
Diagram 3. Showing price equilibrium where Q represents quantity and P represents price.
Crude oil is Venezuela’s main economic driver such that revenues realized from supplying the international market with oil enable it to finance its infrastructure development, wage bill and other expenditures towards economic development. Five years ago, the oil prices on the international market were high motivating the nation’s policy makers to call for greater infrastructure developments towards more stable economic development in the future. The result was the commissioning of huge projects which require massive capital investments. At the time, high international oil prices sustained such projects. After the international oil prices began a free fall, the country’s economy felt the pinch and is now is in economic recession (Al Jazeera Media Network). This has resulted in the country looking outside its boundaries for financial aid from some of international partners. As such, it found such assistance from China, one of the largest consumers of Venezuelan oil.
Diagram 4. Showing quantity and price disequilibrium where Q represents quantity and P represents price.
Quantity and price disequilibrium results from a situation where there are other factors influencing on the market forces such that the free market dynamics are compromised. This is the same situation that resulted when the international oil prices reached a historic high. The result was an oversupply of oil and more so, some countries like the US acquired the motivation to invest in domestic oil production. As a result, countries like Venezuela which seek to produce oil at the price, P1 but the consumers are demanding at Q1. Q2 being higher than Q1, there is an oversupply in a market environment where too little is demanded resulting in a drastic price fall.
Countries like Venezuela can avoid such outcomes by diversifying income sources and limit over-reliance on oil as its main economic driver.
Al Jazeera Media Network. “China to invest $20bn in struggling Venezuela.” Al Jazeera Media Network. 2015. Web. < http://www.aljazeera.com/news/americas/2015/01/china-invest-20bn-venezuela-2015188152276388.html >.