3 Supply and Demand

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CHAPTER OUTLINE

The Demand Curve for Oil

Consumer Surplus

What Shifts the Demand Curve?

The Supply Curve for Oil

Producer Surplus

What Shifts the Supply Curve?

Takeaway

The world runs on oil. Every day about 82 million barrels of “black gold” flow from the earth and the sea to fuel the world’s demand. Changes in the demand for and supply of oil can plunge one economy into recession while igniting a boom in another. In capitals from Washington to Riyadh, politicians carefully monitor the price of oil and so do ordinary consumers. Gasoline is made from oil so when world events like war in the Middle East disrupt the oil supply, prices at the corner gas station rise. The oil market is arguably the single most important market in the world.

The most important tools in economics are supply, demand, and the idea of equilibrium. Even if you understand little else, you may rightly claim yourself economically literate if you understand these tools. Fail to understand these tools and you will understand little else. In this chapter, we use the supply and demand for oil to explain the concepts of supply and demand. In the next chapter, we use supply, demand, and the idea of equilibrium to explain how prices are determined. So pay attention: This chapter and the next one are important. Really important.