Petroleum Industry Analysis

Introduction

The average petrol prices in Switzerland in 2014 are ranked as the 21st highest in the world. Petroleum has a very large impact on modern society and the world as a whole so being able to understand the petroleum market is vital to the worlds and a countries economy. As industries have such a high reliance on petroleum prices for things such as the transportation and production of goods and services, sharp increases and decreases of the prices of petroleum could have a dramatic effect on these industries. A sudden increase in the price of petroleum could cause an economy to go into stagflation. Stagflation is when an economy goes into a state of fixed high inflation mixed with high unemployment and stagnant demand in the economy

Market equilibrium is a market state where the supply in the market is equal to the demand in the market. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market. The marginal cost of production is defined as the change in total cost that comes from making or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. This is because if the market were perfectly competitive there would be a very large number of firms and no barriers to entry or exit, no firm would be able to charge a price higher than the other firms, and in the long-run no economic profits or losses would be earned by the firms in the

This means that if one of the firms increases the price of their above P in order to increase revenue the firm will experience elastic demand. This is because if one firm increases its price the other firms will keep their price the same, consumers will increase their demand for the lowest price as the products are homogenous, therefore the demand for the product with the highest price will decrease and become more elastic. However if a single firm decides to decrease its price below P then it will experience inelastic demand. This is due the other firms lowering their price in order to keep market share. If the other firms lower their costs the firm will gain demand from it initiative. Therefore the demand below price P will become inelastic and will cause the firm to lose profit. As a result the firm may not change its price in fear of the competitor’s response to the change in price leaving it worse off. This shows us why firms in an oligopoly have no incentive to increase or decrease its price, which is why we see a much smaller change in prices in oligopolies than in perfect competition or most other