Will a fall in oil price affects the aggregate supply?

[Guest]

A fall in oil price cause a shift or a movement   ?

[nina101]

As the price of a factor of production has fallen, and oil is one of the major factors of production used worldwide, it will cause a rightward shift in AS curve (why rightwards? because it is now cheaper for firms to produce so they will produce more at the same price). But watch out: though it seem higly likely that it will shift the short run aggregate suppy, we don't know if it will cause a shift of the long run supply curve because we don't know if the demand will adjust eventually. Feel encouraged to ask if you need more info - that's the topic I love, honestly

[Guest]

As the price of a factor of production has fallen, and oil is one of the major factors of production used worldwide, it will cause a rightward shift in AS curve (why rightwards? because it is now cheaper for firms to produce so they will produce more at the same price). But watch out: though it seem higly likely that it will shift the short run aggregate suppy, we don't know if it will cause a shift of the long run supply curve because we don't know if the demand will adjust eventually. Feel encouraged to ask if you need more info - that's the topic I love, honestly

But what about the for oil producing country such as Norway. A fall in oil price means oil mining is less profitable thus As will shift??

[nina101]

 

As the price of a factor of production has fallen, and oil is one of the major factors of production used worldwide, it will cause a rightward shift in AS curve (why rightwards? because it is now cheaper for firms to produce so they will produce more at the same price). But watch out: though it seem higly likely that it will shift the short run aggregate suppy, we don't know if it will cause a shift of the long run supply curve because we don't know if the demand will adjust eventually. Feel encouraged to ask if you need more info - that's the topic I love, honestly

But what about the for oil producing country such as Norway. A fall in oil price means oil mining is less profitable thus As will shift??

 

That's true, fall in oil prices is good news fo oil importers but bad news for oil exporters, such as Venezuela, Nigeria, or Iraq. Norway, though, invests a big part of its oil revenues in so-called oil fund which is unvulnerable to oil prices (because it is simply money). Therefore, fall in oil prices n Norway will lead to lower revenues from mining until the prices recover, but they are unlikely to hurt the economy because Norway is active in many other industries, for which a fall in oil prices means lower production costs. Oil is an important commodity used in virtually every industry, and only the oil-mining industry will see its revenues fall. The most important feature of the situation in which energy price falls is that the costs of production of all the firms using oil as the production input and  get significantly lower.

[Guest]

 

 

As the price of a factor of production has fallen, and oil is one of the major factors of production used worldwide, it will cause a rightward shift in AS curve (why rightwards? because it is now cheaper for firms to produce so they will produce more at the same price). But watch out: though it seem higly likely that it will shift the short run aggregate suppy, we don't know if it will cause a shift of the long run supply curve because we don't know if the demand will adjust eventually. Feel encouraged to ask if you need more info - that's the topic I love, honestly

But what about the for oil producing country such as Norway. A fall in oil price means oil mining is less profitable thus As will shift??

 

That's true, fall in oil prices is good news fo oil importers but bad news for oil exporters, such as Venezuela, Nigeria, or Iraq. Norway, though, invests a big part of its oil revenues in so-called oil fund which is unvulnerable to oil prices (because it is simply money). Therefore, fall in oil prices n Norway will lead to lower revenues from mining until the prices recover, but they are unlikely to hurt the economy because Norway is active in many other industries, for which a fall in oil prices means lower production costs. Oil is an important commodity used in virtually every industry, and only the oil-mining industry will see its revenues fall. The most important feature of the situation in which energy price falls is that the costs of production of all the firms using oil as the production input and  get significantly lower.

 

Sorry,  I still have a question. When the oil price falls, for oil exporters like norway, will that shift the supply curve ?? or a movement ??

[nina101]

It will be a shift. Movement applies to a situation in which you consider what is the value of AS for a particular overall price level in the economy (gdp deflator)

[behaaa]

A fall in the price of oil, an integral part of all production in an economy, will cause a positive supply shock, so SRAS will shift to the right. 

[Guest]

A fall in the price of oil, an integral part of all production in an economy, will cause a positive supply shock, so SRAS will shift to the right. 

 

It will be a shift. Movement applies to a situation in which you consider what is the value of AS for a particular overall price level in the economy (gdp deflator)

But as I mentioned, if the oil mining shares a great proportion of the country's GDP, which means the  fall in oil price is actually detrimental  to the economy. Is it correct? And in that sense, falling oil price brings a leftward shift to the AS curve.? Or failing oil price is a change in average price level, thus a movement ??

Edited February 24, 2015 by Guest

[nina101]

 If the oil mining shares a great proportion of the country's GDP, then a fall in its price will cause both supply curve to shift rightwards (fall in costs of productiona) and aggregate demand curve to shift leftwards (because of the fall in business confidence about the future of all the oil mining companies). This issue has nothing to do with average price level because the price level is influenced by real GDP, not otherwise.

[Guest]

 If the oil mining shares a great proportion of the country's GDP, then a fall in its price will cause both supply curve to shift rightwards (fall in costs of productiona) and aggregate demand curve to shift leftwards (because of the fall in business confidence about the future of all the oil mining companies). This issue has nothing to do with average price level because the price level is influenced by real GDP, not otherwise.

I am really sorry for keep asking question.

 

But if oil price fall, there will be more consumption, as it attracts more people to buy it at low price ....? so will the demand curve shift to the right or the left/...

[nina101]

People are only one component of aggregate demand. The others are firms, foreigners, and government. Since a fall in major production output falls, confidence of firms falls and they buy less, hence a leftward shift of the demand curve. The fact that more people want to buy it at new lower price doesn't mean a shift of AD curve but a movement along it, but such an analysis is a part of microeconomis (what individuals want to buy at what price and what the firms want to suppy at that price), not macro. 

[Vegar Andreas Bergum]

 

 

As the price of a factor of production has fallen, and oil is one of the major factors of production used worldwide, it will cause a rightward shift in AS curve (why rightwards? because it is now cheaper for firms to produce so they will produce more at the same price). But watch out: though it seem higly likely that it will shift the short run aggregate suppy, we don't know if it will cause a shift of the long run supply curve because we don't know if the demand will adjust eventually. Feel encouraged to ask if you need more info - that's the topic I love, honestly

But what about the for oil producing country such as Norway. A fall in oil price means oil mining is less profitable thus As will shift??

 

That's true, fall in oil prices is good news fo oil importers but bad news for oil exporters, such as Venezuela, Nigeria, or Iraq. Norway, though, invests a big part of its oil revenues in so-called oil fund which is unvulnerable to oil prices (because it is simply money). Therefore, fall in oil prices n Norway will lead to lower revenues from mining until the prices recover, but they are unlikely to hurt the economy because Norway is active in many other industries, for which a fall in oil prices means lower production costs. Oil is an important commodity used in virtually every industry, and only the oil-mining industry will see its revenues fall. The most important feature of the situation in which energy price falls is that the costs of production of all the firms using oil as the production input and  get significantly lower.

 

 

This might be somewhat off-topic, but it is worth mentioning I think.

 

Norway´s fund is FAR from invulnerable to oil prices. In November 2014, the Norwegian Krone (NOK) was pretty strong.

 

1USD = ~5.5 NOK

1EUR = ~7.5 NOK

1 British pound = ~ 10.4 NOK

 

December 2014, after the fall in oil-price.

 

1USD = ~8.2 NOK

1EUR = ~9.2 NOK

1 British pound = 11.8 NOK

 

The fall affected the Norwegian economy A LOT. Our largest firms are within the oil-industry and fell over 30% in stock prices over the last 4 months. 

[nina101]

Alright, so it means that a fall in AD was much larger than the rise in SRAS. Sorry then. Still 4 months is short run

Edited February 25, 2015 by nina101

[behaaa]

I see what you are saying, but in general even if the country does not produce oil, it will need to import it, and the question generally implies that oil prices everywhere increase. We also have to assume that the production of the economy relies on oil, thus if prices for oil increase, the cost of production for firms will increases, and so SRAS will shift to the left (negative supply shock)

[nina101]

(...) and the question generally implies that oil prices everywhere increase. 

No, it implies that the prices decrease. Hence, the prices of production will decrease too.

Edited February 25, 2015 by nina101

[behaaa]

 

(...) and the question generally implies that oil prices everywhere increase. 

No, it implies that the prices decrease. Hence, the prices of production will decrease too.

 

Oh yeah sorry I got those mixed up, but in the scenario I described, a negative supply shock will be felt. On the other hand, a decrease in oil prices will most likely lead to a positive supply shock.