IA (Eco) Evaluating the theory of Demand/ Supply

[Eastcoast93]

Hey guys,

I am having some difficulties with the evaluation part of the commentary/ IA.

My article and IA focus on Demand/ Supply Economics, in relation to oil. I said that oil prices were increasing due to scarcity of oil and the current uncertainties sorrounding the situation in the Middle East. This reduced supply and increasing demand from growing developing countries has resulted in high prices and a supply curve that has shifted upwards (including the shift in price and equilibrium quantity).

Now to the evaluation part:

What could I be talking about? The basic question from what I understood in lesson was: "Does the theory work?"- in the case of demand/ supply what do they want to hear? how can something like this work or not work- its happening by itself?

Hope somebody can give me tips.

Greetings and many thanks,

[StSilver]

Well, my economics teacher told us to make sure a few things are always included in the evaluation:

- The long/short term consequences.

- How does it affect the stakeholders and consumers

- Does it/ Can it work?

- Should it be used?

- Is it reaching whom it should?

- Identify alternatives, their consequences, costs and how they compare

I can't remember the others right now, will edit when I find the sheet.

Edited May 16, 2011 by StSilver

[Eastcoast93]

yeah i heard that too, plus advantages/ disadvantages and prioritizing arguments,

but how does this apply to demand/ supply?

[suggaplum]

Well, my economics teacher told us to make sure a few things are always included in the evaluation:

- The long/short term consequences.

- How does it affect the stakeholders and consumers

- Does it/ Can it work?

- Should it be used?

- Is it reaching whom it should?

- Identify alternatives, their consequences, costs and how they compare

I can't remember the others right now, will edit when I find the sheet.

yeah i heard that too, plus advantages/ disadvantages and prioritizing arguments,

but how does this apply to demand/ supply?

Long term and short term consequences of the depletion of oil. You can touch on sustainable development and how increasing prices due to scarcity does not allow sustainable development to happen since we are compromising the ability for future generations to use the non-renewable resource, oil, for present use. Short term consequences may be bidding up higher prices cause higher costs for firms and therefore causing higher prices and therefore less consumption. There might therefore be less economic growth.

How does it affect the stakeholders and consumers

Producers and consumers are both affected however since it is an inelastic good, much of the costs for the producers can be passed onto the consumer without having a significant drop in demand. Scarcity might also lead do queues in the petrol station etc.

Refer to your article and identify the other possible consequences and then expand on that based on the theory you have learnt.

Then refer to your article and see if there are any measures that could be taken that could relief this stress. However, bear in mind that its PES is nearly perfectly inelastic and PED is inelastic, it is quite hard to find alternatives for oil and everyone needs it. Other methods of generating electricity for example; solar energy, requires much more capital and investment to do.

Remember to prioritise your argument.

Btw, apologies for adding points from other topics after learning the whole syllabus you'll understand that everything is interrelated and i's hard to solely pinpoint on one topic to talk about. It is okay if you touch on them and briefly mention/explain them in your commentary however focus on demand & supply.

Good luck

[dessskris]

what a coincidence! I am writing a similar IA...

also suggest what the government can do to bring the price down (I can't be bothered to read all of the posts above carefully. just skimmed through them and didn't find one that suggested this). like to increase supply and reduce demand's what can the government do?

you may also talk about a substitute good of oil and see how this high price affects the demand/supply of that substitute good.

[Eastcoast93]

Thank you so much. Really helpful!

I have one more question though:

Our teacher said we should start with "An evaluation of economic theory shows..." and then we should comment on whether the theory works.

Would you say that theory works or not so much?

[dessskris]

by right you don't have to start like that... but if your teacher wants you to do that then...

yes it works because you said reduced supply and increasing demand resulted in high prices. it's true, because when you shift your supply curve to the left and your demand curve to the right the equilibrium price rises

[Eastcoast93]

oh okay

i thought it didnt work because of the following points:

1. Oil (Commodity) Prices might rise too much, making it unaffordable for the people

2. Economic Growth might be hindered because expenditure on other goods decreases

3. Sustainable development can not occur

But, as I see from yours- what they mean with "if the economic theory works" is just if the theory from the textbook fits with the story in the article? In this case that the prices rise to ration demand and increase supply and that a shift in supply curve to the left and the demand curve to the right will result in an increase of the equilibrium price.

Did i get that right?

Would it be possible to mention all the negative aspects of the story (see numbered points) even if the theory works well?

[suggaplum]

oh okay

i thought it didnt work because of the following points:

1. Oil (Commodity) Prices might rise too much, making it unaffordable for the people

2. Economic Growth might be hindered because expenditure on other goods decreases

3. Sustainable development can not occur

But, as I see from yours- what they mean with "if the economic theory works" is just if the theory from the textbook fits with the story in the article? In this case that the prices rise to ration demand and increase supply and that a shift in supply curve to the left and the demand curve to the right will result in an increase of the equilibrium price.

Did i get that right?

Would it be possible to mention all the negative aspects of the story (see numbered points) even if the theory works well?

Since it is an evaluation, it would be ideal for you to point out the negative and positive impacts. As dessskris said above, you do not really have to start with that and the theory does apply since market clearing price does rise due to the decreased supply.

For a counter argument,

1. Oil is an inelastic good since it does not have many substitutes available and therefore even though prices rise, quantity demanded would fall by a proportionately lower amount. Thus, even though there will be an increase in price, demand would not drop significantly. Especially how oil is needed in so many industries (factories, plastics, household etc)

2. Economic Growth MAY be hindered however I think that should only be talked about briefly. Instead, I think you can emphasise more on the impact on the sale of cars since petrol/oil and cars are complementary goods. With an increase in oil prices, consumers will be discouraged to buy cars as the expenditure would be much higher. Ultimately resulting in, yes, low economic growth.

I don't think your IA should really be about how does it fit the theory, but instead you should attempt to evaluate in which how this problem affects different stakeholders of the economy, what are the consequences and if any, the solutions that the government could take.

But as an answer to your question, yes, the theory does apply.