Case Study- 01
Some hate it and some love it, but regardless of how you feel
oil is still a key part of our daily lives. The average Canadian
uses about 20 barrels of oil each year, equivalent to about
one and a half swimming pools. Since it is such a major part
of our expenses, oil is a product where, when price changes,
we really notice.
In 2008, China’s expansion sparked a long period of high
prices. In this case study, we will analyze what has happened
to these prices over time and the impact this has had on oil
producers from the lens of producer theory.
To simplify our case study, let’s assume that the oil market is
perfect competition.
1. Consider the following producer theory model for a
single firm producing oil, and the aggregate supply and
demand. What is the firm’s equilibrium price and
quantity?
2. What is the firm’s profit at this level?
3. What will occur in the long-run for this market? Show
this on the new graph below.
Case Study-02
The period of high prices indeed incentivized private firms to
search farther than ever before – in the Arctic, Brazil’s pre-
salt fields, deep waters off Angola, and Canada’s oil sands to
ever expand the supply of oil. Investors encouraged this
activity, rewarding future growth as much as profitability.
Oil prices have been quite volatile. Recently, from mid-2014
to early 2016 oil prices plummeted from $110 a barrel to
around $27. This sharp decline has been due to a number of
causes. A key cause was when sanctions were lifted from
Iran, a new producer entered the market with large
quantities of oil. In addition, growing fears about action on
climate change, coupled with the emergence of alternative-
energy technologies, caused producers to pump as hard as
they can, while they can.
In the industry at large, the incentive is to keep producing “as
flat out as you can”, once investment costs have been sunk
into the ground, says Simon Henry, Shell’s chief financial
officer. He says it is sometimes more expensive to stop
production than to keep pumping at low prices, because of
the high cost of mothballing wells. He suggested that firms
will not pack up so long as prices cover day-to-day costs, in
some cases as low as $15 a barrel.
It may be uneconomic to drill new Deepwater wells at prices
under $60 a barrel, he says, but once they are built it may still
make economic sense to keep them running at prices well
below that. Such resilience is used by some to justify why
they expect prices to remain “lower for longer”.
Question:
1. What does this excerpt suggest about how firms will
behave in the short run?
2. Based on the information given about this market, what
do you think the time horizon will be for this industries
‘long run’? What will happen in the long run?
Case Study-03
Interesting things have been happening in the chemistry labs
of UVic. Professor Fraser Hof and Philips Brewery chemist
Euan Thomson have been collaborating to revolutionize the
craft brewing process.
The project was inspired by a very different invention from
Hof’s lab—the only one of its kind. “We created a tool for
profiling the proteins in cancer cells,” said Hof. “And I
realized that it could also be used to profile the proteins in
brewer’s yeast.”
we talk about the opportunity costs of an action. Let’s
explore how opportunity costs might impact decisions on
what to research.
Assume that the government provides $50,000/year for the
department to conduct cancer research, and the costs of
operating the research lab is $30,000. Philips offers
$70,000/year to do beer research, but researching beer
would increase costs by $5,000.
1. What is the opportunity cost of conducting cancer
research? Break this into implicit and explicit costs.
Case Study – 04
Interesting things have been happening in the chemistry labs
of UVic. Professor Fraser Hof and Philips Brewery chemist
Euan Thomson have been collaborating to revolutionize the
craft brewing process.
The project was inspired by a very different invention from
Hof’s lab—the only one of its kind. “We created a tool for
profiling the proteins in cancer cells,” said Hof. “And I
realized that it could also be used to profile the proteins in
brewer’s yeast.”
we talk about the opportunity costs of an action. Let’s
explore how opportunity costs might impact decisions on
what to research.
Assume that the government provides $50,000/year for the
department to conduct cancer research, and the costs of
operating the research lab is $30,000. Philips offers
$70,000/year to do beer research, but researching beer
would increase costs by $5,000.
1. What is the total economic profits from this choice?
CASE STUDY 1 AND CASE STUDY 2 ANS
Solution: Case Study – Oil Markets – Principles of Microeconomics ([Link])
CASE STUDY 3 AND CASE STUDY 4 ANS
Solutions: Case Study – Beer or Cancer? – Principles of Microeconomics ([Link])
