Where is all the oil?

1) Explain why oil prices have been rising. Use a diagram to illustrate your answer.
The oil prices have been rising due to inflation, as well as to the always rising demand. The weak dollar has caused the prices to rise as the explanation is that the costs have also risen due to inflation and exchange rates. The prices recently have actually rocketed, this year, going from only 80 a barrel to peaking 110 dollars in april. The chart below shows you the prices of oil for the last year, as it is noticeable we have reached a peak in April which in my opinion was due to the massive quantitative easing the U.S. government has done.

2) How can the concepts of price elasticity of demand, income elasticity of demand and price elasticity of supply help to explain the magnitude of oil price movements?
Since OPEC is controlling most of the worlds's oil supply and the most of our cars and heating is powered by oil, the prices elasticity is very low. If there was an oil crisis and there would be no more oil supplied the whole world would go into chaos since we are not ready to convert to other sources of energy, we are slowly getting there but we still have a long way to go. Oil is not a energy source that can be substituted easily, unfortunately the modern society is dependent on oil.

3) Examine what is likely to happen to oil prices over the coming months. What are likely to be the most important factors in determining the direction and size of the price movements? Distinguish between demand-side and supply-side effects in your answer.
Well I predict that the prices of oil will rise due to a winter coming up. Although the OPEC has agreed mainly to the prices to stay between 80-90 for a barrel of crude oil, I do believe they will want to make a profit fromt he rising demand after the crisis. The main factor of the prices will still be the dollar, if its inflation will keep on droppin the prices will be getting more and more expensive, although if the dollar strengthens itself I believe the prices will stay the same.

4) What are ‘crude futures’? Explain how actions in the futures market are likely affect spot prices.
I believe the prices of oil will stay strong for another couple years, a decade or two. Although with advances in technology and inventing new alternative sources and advancing in the current alternative sources like solar power or electric powered cars, we will be able to stop being dependent of oil. This will make the OPEC countries economies drop massively the day the world stop using 90% of its energy from oil.

5) To what extent can OPEC control oil prices?
OPEC is very powerful in controlling oil prices since those countries are the main suppliers of oil. If they would want to they would be able to stop pumping oil and the whole world would be doing what they want. Since OPEC is the backbone of the oil business. They do whatever they wish as Sieminski chief economist in Deutsche Bank.

6) If crude oil prices go up by x%, would you expect petrol station prices to go up by approximately x%, or by more than or less than x%? Explain.
If the crude oil prices would go up by x% the prices at the stations would go up by at least 10% more than the increase in crude oil, since the companies also have to pay for transport and other capital that uses up oil. The tax will rise on oil as well and all those will make the oil for the average consumer increase much more than the oil on the market.

7) Why have central heating oil prices risen by around 70% of over the past three months? What are the implications of your answer for the type of market structure in which central heating oil companies are operating?
They have risen over the 3 months due to the companies seeing profit in rising them. The prices have risen during the cold months leading to people needing to heat, that was a great opportunity for the oil companies to make much more profit. It is said that the prices of heating oil go head to head with crude oil although this time the prices of heating oil rose 70% and the prices of oil only 17%... Interesting right?

What do you think?
Erlach

Cars Cars and More Cars!

1) What type of tax is VAT? Illustrate the effect of such a tax on a diagram and explain why the higher the price of the good, the bigger the impact of the VAT rise. How might this impact inflation?
The diagram below shows what VAT is. VAT stands for value added tax and is on almost everything an average everyday consumer buys. VAT is a consumption tax and only the consumer on the end of the production chain has to pay this. It can also be considered that it is a indirect.
Below the graph shows how VAT effects the price of products. The supply line labeled Supply shows what the price would be without VAT and the line with Supply + VAT shows the real price. Depending on the price of a certain good the tax will be higher since VAT is a percentage tax it is not a flat rate tax. VAT is equal to a percent of the real price of the product. E.G. the VAT in England is 20%, lets say that a bottle of water distilled in diamonds costs 100 pounds without VAT, with VAT it will cost 120 pounds. This can effect the inflation since the prices of products rise the inflation will rise.

2) Why are car sales expected to fall in the UK over the coming year? Given this expected trend, what might we expect to see in terms of car prices?
The sales of cars in the UK are supposed to drop as most of the articles from January 2011 said. This is due to the rising tax in 2011 from 15% VAT to 20%VAT. This reduces demand for cars since the prices is higher for an average consumer. Another reason why the sales are expected to go down, is that the scarppage scheme is over, people have bought cars during the scrappage scheme since it was cheaper to turn in their old car and get a new one.

3) What impact might rising petrol prices have on new car purchases? What figure would you expect to see for cross elasticity of demand?
Due to rising petrol prices, the demand for small and efficient cars will rise, and the demand for big gas guzzling SUVs will fall. The elasticity of demand will probably be under 1 since people will have the choice to start using public transport and reduce usage of private cars.

4) How might the expected decline in car sales affect the UK economy over the next 12 months?
The decline in the cars sales always effect the economy in a bad way. Since cars have a lot of expensive complementary goods. A decline in sales will lead to companies having lower profit therefore having to reduce costs by making workers redundant. Making workers redundant will increase the unemployment this leading people to not having money to spend on good. As you can see all this is just a huge chain of collapse.

5) What type of market structure is the car industry? (Think about the characteristics of
monopolistic competition and oligopoly.)
The car industry is competitive as well as oligopoly. There is much competition of the market when it comes to cars, although the biggest companies are owned by a few major holdings. An example of this is the Volkswagen group which owns about half the european cars including Audi, Bugatti, Bentley, and Lamborghini. So I cant not exactly decided between one or another, they are a close call. GMC is also a huge holding group which is the owner of many big brands, although due to its financial problems lately it has not been so competitive as European or Asian cars.

6) How did the car scrappage scheme help car sales?
Thanks to the car scrappage scheme, people who turned their old car in received 2000 pounds for a new car. Half of the return came from the car producer and the second half from the government. This was great because it encouraged people to start buying cars, to boost the car sales. Since 2010 was considered a hard time for car industry it was a very smart move.

7) What might explain the different trend seen in the German car industry?
The different trend seen in the German car industry is very obscure, although my opinion is that it is due to that the Germans produce some of the best cars. These cars have higher demand than French or Spanish cars. As well as thanks to the Scrappage Scheme in the UK people bought probably a lot of German cars. Thanks to smaller market shares of the other countries Germany managed to increase its market shares and sales. Someone always wins, even if in the worst situation.

What do you think?
Erlach

Mayhem

1) Why did commodity prices fall so dramatically in early May, only to rise again rapidly afterwards?
There are two main possibilities. The first one would be that it was an adjustment on the way to a commodities bubble burst. The second possibility was that we have reached the top of the bubble and it has burst. Although due to the prices rising again it is much more logical to say that it was just an adjustment to a much worse to come bubble burst which will leave millions of people shocked. There are another few theories on what affect the commodity prices, movement away from currencies meaning major currencies have been doing bad lately and people started investing in more stable things like commodities. This causing the commodity prices to rise since there is more demand for them. As well as China influences the prices, due to the extremely high economical growth and the middle class trying to secure their new earned wealth by buying commodities.

2) Why do commodity prices fluctuate more than house prices?
Commodity prices fluctuate more than house prices because, houses are a necessity, people need somewhere to live therefore the demand for houses is much less elastic than the demand for commodities. This meaning that a person without a house will have to buy a house although an individual without money to buy his favorite eggs or due to the prices going up will be able to replace it with bread or a different commodity. Since most commodities are substitutional.

3) What is the relevance of price elasticity of demand and supply in explaining the volatility of commodity prices?
The elasticity of varies on who the person buying is. If it is industries which produce products, it will very inelastic. Especially firms that need oil since there are little alternative to oil. On the other hand the elasticity of commodities for individuals is great, since most individuals who buy commodities invest in them to make a profit by selling them later. No straight minded individual would buy 200 tons of cotton just for the fun of it.

4) Under what circumstances is speculation likely to be (a) stabilising; (b) destabilising?
A) Speculation is likely to be stabilizing if the commodities prices are stable and follow the trend. As well as when they will have a stable growth or stable decline and will follow trends.

B) Speculation is likely to be destabilising under a few circumstances. The main one would be if the prices of commodities continue to be a mayhem as they are now. The sudden drop in the price of commodities in May 2011 and then the still strong growth has set speculators of.

5) To what extent are rising commodity prices (a) the cause of and (b) the effect of world inflation?
A) Rising commodity prices are not the cause of inflation.
B) The rising inflation is the cause of the commodities prices to be increasing. This is simple, since the value gets cheeper the prices of the commodities get bigger. Since the inflation in most countries has been rising pretty much lately commodities started looking very attractive for individual buyer.

6) If commodity prices go on rising every year, will inflation go on rising? Explain
Yes the inflation prices will rise with the prices of the commodities due to a simple reason. If the commodities are more expensive firms will need to raise the prices of their products to be able to still have profit. The prices of products in our stores rising will make inflation go up, or well it is the inflation rising.

Hope you enjoyed.

26 September Questions

1) What are the most powerful driving forces behind the demand for energy?
One of the most powerful driving forces behind the demand for energy is population. The population since 1970 has doubled to about 7 billion people. Another powerful force is advancement in technology. As BP's report states the demand for energy will only increase by 1.7% a year. This is very low taking into account how much the world is expanding although with more advancement in technologies there is less demand for energy with more efficient machines.

2) Why does the report forecast virtually no increase in energy demand in developed countries? What assumptions are made about growth rates in OECD and non-OECD countries?
The report forecasts that the energy demand will grow about 1.7% a year in developed countries. This is due to continuos advancement in technology. A great example is the European Union, there has been a new law passed since about 2010 that there are only going to be light saving light bulbs sold. This is a great decrease in the demand for energy in all of the EU. Assumptions are made that non OECD countries will as well catch up with the OECD countries with lower energy consummations.
Below the demand for energy per GDP produced in a few countries.

3) What factors would lead to a substitution of sustainable energy sources for fossil fuels? What would detrmine the size of such substitution?
- A shortage of fossile fuels
- Innovation
- Much higher costs of fossile fuels
- New laws bannig fossile fuels

Probably the main reason for these substitutions would be the environmental impact on our environment. People are crazy right now about saving the planet and preventing global warming. As well as scarcity of fuels would effect such substitutions.

4) What is the role of the price elasticity of demand for and supply of oil and the income elasticity of demand for oil in determining oil consumption in different parts of the world?
Often the demand elasticity for energy sources is very non elastic since there is no substation for the energy. Coal power plants do need coal to be run and cars need oil. As well as most of the energy meaning oil and gas are provided by OECD countries which might increase the price. The higher the price the lower the demand will be although not much. People will start making shorter trips and investing in more fuel efficient cars.

5) Why may high energy prices not necessarily mean ‘doom’?
High energy prices do not necessarily mean doom. "As a wake up call they can bring incentive for solution"- The Telegraph. A great example is the U.S. when the prices of oil were very low there the public always bought gas guzzling cars. Although now the when the prices have increased as well in the U.S. the famous American car Hummer was closed down and instead the factory will be producing small cars. High prices set a greater pressure on finding solutions.

September 25th Questions

1) Why have the prices of gold and silver risen so much recently?
The prices of silver and gold have risen extremely recently due to the weakness of the dollar. It is considered a safe-haven for investors lately. The price of gold has six folded in the last decade and might still rise. The price of gold has increased as well due to the U.S. doing quantitative easing which lowers the value of reserves of countries which use the dollar as their reserve, therefor e.g. China is critiquing the U.S. and starting to buy gold instead of dollars.

2) Why has silver risen more than gold?
Silver has rissen more than gold due to two different aspects. The main one is that silver is much more widely used in production than gold. Silver is used for producing electronics mainly on the other hand gold in mainly used in jewellery, and since the world economy is come out of its trough and entered recovery already the demand for electronics as any other good has risen. The second factor is that silver is far below the gold-silver ration. Apparently compared to the current price of gold silver should be valued atleast twice as much as it is now.

3) Why may higher rates of world inflation make investors turn to precious metals for investment?
Higher levels of inflation cause investors to turn to precious metals due to the fact that gold does not have an inflation. The higher inflation on a currency the faster it looses its value, on the other hand gold will become more and more expensive if their is inflation making it a reasonable investment.

4) How are future decisions by the Fed likely to affect the price of gold?
Future decisions of the Fed will be very important on the gold price and unfortunately it is predicted that the Feds decision will decrease the price of gold. Since due to inflation the Fed will raise interest rates causing investors to pull their money out of the market and put it into banks causing the price of gold to drop.

5) According to the efficient capital markets theory (strong version), the current price of a commodity should already reflect all knowable factors that are likely to affect the price? Does this mean that speculative buying (or selling) is pointless?
Speculative buying or selling is not pointless since the efficient capital market theory does say that all the factors are reflected although everything might change over a split second. Someone may be speculating a huge crash in the economy due to the inflation rising or a natural disaster. The efficient capital markets theory does not reflect things that will happen in the future.

6) How is the price elasticity of supply of silver and gold relevant in explaining the magnitude of their price movements?
There is a bigger price elasticity in gold than silver since silver is a much more vital element for production of electronics. The main use for silver is production of electronics whereas over half of gold is used on jewellery. The price movement of silver has increased due to it having a very small elasticity in electronics since its a vital part, due to the economy being in recession the demand for electronics is increasing and silver is a necessary resource to produce electronics. On the other hand golds elasticity is slightly bigger since it mainly is used for jewellery. Jewellery can be spared and a substitute for it can be found. Since indias demand for gold has risen by 69% in the last year due to its weddings this might suggest that the elasticity of gold is actually not that small since for a wedding people will probably invest in actual gold than in a substitute for gold since it is a special occasion.

24 September Questions

1) Why may relative income tax rates between countries give only a partial picture of the international competitiveness of theses countries? What else would need to be taken in account?
The relative income tax rates between countries are not the only point of competitiveness. Other things are very important to be taken into account. If the country is undeveloped, earners will not be interested in moving to that certain country. As well as the stability of the taxes is an important facts, if the tax is low but has had a history of swings up and down its not very attractive. Also into consideration needs to be the laws of the certain country. These might affect the earners choices. Countries without tax are called Tax-Havens Kuwait is one of the 12 in the world. Although some of those countries do have strict laws for their citizens to be involved in the countries economy.

2) Does making taxes more steeply progressive necessarily act as a disincentive to output? Explain
Making taxes more steeply progressive is not necessarily a great idea, since the higher the tax is on the high earners the more likely they are to leave the country and find one where they will receive more income. “The 50 per cent tax rate on people earning more than £150,000 a year, combined with increases in national insurance, has undoubtedly made the UK less attractive to high earners. Many of these people will be highly skilled and they are usually very mobile.”- Mark Giddens

3) What factors are likely to determine the relative size of the income and substitution effect of tax changes?
Disposable income is of course determined by the amount of taxation and as well on the amount someone earns per year. Italy has the highest rates for high earners and they only get to keep about 54.1% of their raw income, Netherlands is right behind with only 54.7% of the income received by the earners.

4) How progressive are income taxes in the UK compared with other countries? Give Examples.
In the UK a high earner with an income of £122,000 only takes home 60.9% of this income. On the other hand high earners in Russia get to keep about 87% of their income. The UK income taxes are very progressive compared to countries like Japan or Dubai. Dubai has no income tax so there is not progression depending on the salary. Although Japan a worker earning £25,000 gets to take home 90.8% of his income, on the other hand someone earning $200,000 in Japan gets to keep 72% of his income. In the UK an average worker with $25,000 income takes home $20,799 and someone earning $200,000 takes home only $121,819.

5) What externalities (positive and negative) might result from steeply progressive income tax rates?
From steeply progressive income tax there might be a few consequences. The positive ones would be that low income workers would stay since they would receive lots of their own salary. Although on the other hand high earners which are fewer although much wealthier would start leaving since they will keep a much smaller amount of their money.

6) What determines the international elasticity of supply of labour?
The international elasticity of supply of labour is determined by the ability to travel mainly, as well as the ability to receive a job in a different country. Taxes are a huge part of this as well for everyone since e.g. an average worker in Russia receives 3 times as much salary as an average worker in Germany.

7) What is the Laffer curve? How will the shape of the Laffer curve be affected by the international mobility of labour and international tax rates?
The Laffer curve is a theoretical representation of the relationship between governments revenue raised by its taxation. The higher the progressiveness of taxation the flatter the curve will be since high earners will start leaving the country. On the other hand if the taxation is low the curve will we stretched upward.

Being Pro-Active

I have decided to set some targets for myself, to improve my knowledge of economics.
1) Each day I will take a newspaper article and discuss some of the points and post them on my blog. I hope other pupils who are as hard working as me will do the same and leave comments if they wish. (Polite comments only please)

2) Over the next 5 days I will especially concentrate on 3.11 and 3.12 which is production possibility, value judgements, and elasticity.

3) Because I do not only want to rely on a text book and enter dialogue with world famous economists I may also be posting to this blog http://www.rybinski.eu/?lang=all

Macro Economics

Made In Britain

Major key points from the movie Made in Britain

• Britain is 7th biggest manufacturer in the world
• Services in Britain make up for three quarters of the entire economy
• The industrial revolution began in Britain
• China has caught up so quickly due to not inventing technology but importing technology
• Shanghai is the centre of China's industrial revolution. 
• Berwin moved its production to China, cutting their production cost to only 4 Pounds per suit. 
• Out of the 10 busiest ports in the world there are 7 in China.  
• Britain exports 4 billion Pounds, and imports 30 billion more than it exports. 
• Britain has a lot of specializations and innovations in comparison to China were they only have cheep labour. 
• Britain produces 1.3 million cars per year although all British car companies are owned by foreign investors. 

First post!

Hello world ready for some economics?