Article Brief 2

Article Brief #2       Syllabus Section 1           Word Count: 552 Written: Jan 26, 2015

Source: http://www.bbc.com/news/business-29643612

Concepts:   Scarcity, Opportunity Cost

Diagrams: PED

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Brief Summary of Issue: Arguably the most striking news nowadays is the decrease in oil prices and the impact it has had on the Russian economy. After Ukraine and Russia entered the war, the Russian economy has not had very bright days: due to the extreme decrease in their main income, energy sources, the worth of rubel has decreased by 100% in the a few months. Every 1 dollar decrease in oil prices per barrel, Russia loses 2 billion dollars form its revenue!

Economic Linkages: This issue clearly illustrates the concepts of scarcity and opportunity cost which are central to economics.

One of the most scarce resources, oil, has had massive impacts on economies. As it is scarce, the demand and of course the price is very high. This creates a massive income for such countries such as Russian, but when the prices go down, it creates a massive crisis. After the decreasing prices, the Russian economy lost great amounts in revenue, which led to the massive decrease in the worth of rubels. Globally, buyers aren’t in the best economic shape; therefore, do not buy the resource at the same prices they bought previously anyways. In addition to this, the U.S refusing to buy oil has lowered prices even more. The opportunity cost here is the income and the supply. As producers cant stock this resource, they are obliged to sell it at very low prices.

Application of Concepts:   This is a PED graph, which show the responsiveness of demand to the change in price. We see a near vertical demand curve, which suggests the demand is inelastic; or, in other words, not responsiveness to the price change.
Screen Shot 2015-05-20 at 11.33.27 PM

The demand curve is not perfectly inelastic, but has a demand curve close to vertical. As this good is inelastic, the change in price percentage is certainly greater that that of quantity demanded.

Russia here for example, as they depend heavily on energy such as gas and oil, no matter how low the buyers are willing to pay, they have to sell it. Oil is a resource that cannot be stocked; therefore, they are obliged to sell it at very low values. The oil prices have decreased from 110 dollars per barrel to below 48 dollars. It is also important to note that this is a great impact on the Russian economy because for every one dollar decrease per barrel, 2 billion dollars is cut from revenue.

P is the initial price at 100 dollars per barrel a few months ago and P1 is the price today at 48 dollars. There is a very small change in the demand due to price. By calculating the revenue by price x quantity, we can calculate the impact it has on revenue.

Evaluation:   It is extremely important to understand why oil prices are decreasing and the consequences it has on economies. As it has impacted the Russian economy immensely, the rubel value has decreased a lot. As most companies have their income in rubels and pay the producers in another currency such as euros, the consequences are great. Due to this reason, many companies have gone bankrupt due to debt. Understanding how prices work can help countries take important measures – such as the production of oil.

It is also important for the individuals to understand this trend and what factors affect what. Russian companies in Russia could keep their production at low rates until the time of the crisis. Or else, large investments can result in bankruptcy. Understanding opportunity cost and making appropriate decisions are vital too. Cutting oil prices to sell their already produced oil has had great impacts on revenue. This is the reason for why rubel has decreased by more than 100% in the past few months.

Categories: Economics

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