ECS1501
Assignment 3
DUE 21 July 2025
,ECS1501
Assignment 3
DUE 21 July 2025
Question 1: Market Conditions in the Oil Market (12 marks)
(i) Market Condition Depicted in the Cartoon
The cartoon depicts a surplus condition in the oil market, characterised by excess
supply where the quantity supplied exceeds the quantity demanded at the prevailing
price. This situation creates market disequilibrium, typically resulting from
overproduction, weakened global demand, or geopolitical strategies that sustain
output despite falling prices.
Underlying Assumptions
• The market is competitive, with flexible prices adjusting to eliminate
disequilibrium.
• No government-imposed price floors or ceilings prevent price adjustments.
• Producers are profit-maximising agents responsive to market signals.
Critical Reflection
This surplus condition, while explained via classical market theory, ignores real-world
complexities such as price stickiness from long-term contracts or strategic
production quotas by OPEC, which aim to stabilise prices despite surpluses (World
Bank, 2025). Surpluses also signal resource allocation inefficiencies, potentially
destabilising oil-dependent economies reliant on stable export revenues.
Reference: World Bank. (2025). Commodity Markets Outlook. www.worldbank.org.
, (ii) Diagram of the Oil Market
Diagram depicting surplus in the oil market:
Price (P)
Diagram Explanation
• Axes: Vertical = Price (P), Horizontal = Quantity (Q).
• Curves: D (Demand) slopes downwards; S (Supply) slopes upwards.
• Equilibrium (E): At price P* and quantity Q*, where D and S intersect.
• Surplus: At price P1 (above P*), quantity supplied (Qs) exceeds quantity
demanded (Qd), creating a surplus of (Qs – Qd).
Assumptions
• Static supply and demand curves (no shifts over the short run).
• Prices adjust freely with no market intervention.
Assignment 3
DUE 21 July 2025
,ECS1501
Assignment 3
DUE 21 July 2025
Question 1: Market Conditions in the Oil Market (12 marks)
(i) Market Condition Depicted in the Cartoon
The cartoon depicts a surplus condition in the oil market, characterised by excess
supply where the quantity supplied exceeds the quantity demanded at the prevailing
price. This situation creates market disequilibrium, typically resulting from
overproduction, weakened global demand, or geopolitical strategies that sustain
output despite falling prices.
Underlying Assumptions
• The market is competitive, with flexible prices adjusting to eliminate
disequilibrium.
• No government-imposed price floors or ceilings prevent price adjustments.
• Producers are profit-maximising agents responsive to market signals.
Critical Reflection
This surplus condition, while explained via classical market theory, ignores real-world
complexities such as price stickiness from long-term contracts or strategic
production quotas by OPEC, which aim to stabilise prices despite surpluses (World
Bank, 2025). Surpluses also signal resource allocation inefficiencies, potentially
destabilising oil-dependent economies reliant on stable export revenues.
Reference: World Bank. (2025). Commodity Markets Outlook. www.worldbank.org.
, (ii) Diagram of the Oil Market
Diagram depicting surplus in the oil market:
Price (P)
Diagram Explanation
• Axes: Vertical = Price (P), Horizontal = Quantity (Q).
• Curves: D (Demand) slopes downwards; S (Supply) slopes upwards.
• Equilibrium (E): At price P* and quantity Q*, where D and S intersect.
• Surplus: At price P1 (above P*), quantity supplied (Qs) exceeds quantity
demanded (Qd), creating a surplus of (Qs – Qd).
Assumptions
• Static supply and demand curves (no shifts over the short run).
• Prices adjust freely with no market intervention.
