Assume that the world market for crude oil is competitive, with an upward-sloping supply

schedule and a downward-sloping demand schedule. Draw a diagram that shows the
equilibrium price and quantity. Now imagine that one of the major oil exporting countries
undergoes a revolution that shuts down its oil fields. Draw a new supply schedule and show
the loss of consumer surplus in the world oil market resulting from the loss of supply. What
assumptions are you making about the demand for crude oil in the measurement of
consumer surplus?

Unfortunately, as a text-based AI model, I'm unable to draw diagrams directly. However, I can
guide you through the process of understanding and drawing the diagrams.

1. Initial Equilibrium:
a. Draw a graph with the quantity of crude oil on the x-axis and the price of crude oil on the
y-axis.
b. Draw a downward-sloping demand curve (D) and an upward-sloping supply curve (S).
They intersect at a point, representing the initial equilibrium price (P1) and quantity (Q1).
2. Revolution Impact:
a. Now, imagine a revolution in one of the major oil-exporting countries that shuts down its
oil fields. This will reduce the global supply of crude oil.
b. Draw a new supply curve (S') to the left of the original supply curve, indicating a
decrease in the supply of crude oil.
 3. New Equilibrium:
i. The intersection of the new supply curve (S') and the demand curve (D) gives the new
equilibrium price (P2) and quantity (Q2).
ii. Due to the decrease in supply, the new equilibrium price will be higher than the initial
equilibrium price, and the quantity traded will be lower.
4. Loss of Consumer Surplus:

To illustrate the loss of consumer surplus, you can shade the area between the demand curve and
the new equilibrium price (P2). This shaded area represents the consumer surplus lost due to the
decrease in the supply of crude oil.

5. Assumptions about Demand:

The measurement of consumer surplus assumes that the demand for crude oil is relatively elastic.
Elastic demand means that consumers are responsive to changes in price. If demand is inelastic,
consumers would be less responsive to price changes, and the loss of consumer surplus might be
smaller.

Remember to label your axes, curves, and equilibrium points appropriately. This exercise is
based on the assumption that the world market for crude oil is initially competitive, and the
subsequent disruption leads to a decrease in the global supply of crude oil.

Assuming that the world market for crude oil is competitive, now imagine that one of the
major oil exporting countries undergoes a revolution that shuts down its oil fields. show
the loss of consumer surplus in the world oil market resulting from the loss of supply. what
assumptions are you making about the demand for crude oil in the measurement of
consumer surplus?

In a competitive market for crude oil, the equilibrium price and quantity are determined by the
intersection of the supply and demand curves. When a major oil-exporting country undergoes a
revolution that shuts down its oil fields, it leads to a reduction in the global supply of crude oil.
As a result, the market supply curve shifts to the left, causing an increase in the equilibrium price
and a decrease in the equilibrium quantity.

Now, let's consider the loss of consumer surplus resulting from the loss of supply. Consumer
surplus is the area between the demand curve and the price paid by consumers up to the quantity
traded. With the reduction in supply, the new equilibrium price is higher, leading to a decrease in
consumer surplus. The loss of consumer surplus can be illustrated graphically as the reduction in
the area between the original demand curve and the new higher equilibrium price.
Assumptions about the demand for crude oil in the measurement of consumer surplus include:

Elasticity of Demand: The extent to which the quantity demanded responds to changes in price
is a crucial factor. If demand is relatively inelastic, consumers may bear a larger burden of the
price increase, leading to a greater loss in consumer surplus.

Market Structure: The assumption of a competitive market implies that there are many buyers
and sellers, with no single entity having significant market power. In reality, the oil market has
elements of competition, but it also has features of an oligopoly, given the dominance of a few
major oil-producing countries. The impact on consumer surplus may differ depending on the
degree of competition in the market.

Time Horizon: The short-term versus long-term elasticity of demand is another important
consideration. In the short term, consumers may have fewer alternatives to adjust their
consumption patterns, resulting in a more significant impact on consumer surplus.

Availability of Substitutes: The availability and feasibility of substituting other energy sources
for crude oil can affect the elasticity of demand. If there are readily available substitutes, the
impact on consumer surplus may be mitigated.

It's important to note that these assumptions and considerations may vary depending on the
specific conditions of the oil market and the global economy. The actual impact on consumer
surplus would depend on the complex interactions of these factors.

Now assume that the United States is a net importer of crude oil. Show the impact of the
price increase resulting from the loss of supply to the world market on social surplus in the
US market

When the United States is a net importer of crude oil, it means that it consumes more oil than it
produces, relying on imports to meet its demand. In the scenario where a major oil-exporting
country undergoes a revolution, leading to a reduction in the global supply of crude oil, the world
market price of oil is likely to increase. This increase in the world market price affects the U.S.
market in several ways.

Price Increase in the U.S. Market:

I. As a result of the reduction in global supply, the world market price of crude oil
increases.
II. The U.S., being a net importer, experiences a higher price for the imported oil.
Impact on U.S. Consumers:
a. U.S. consumers face higher prices for gasoline, diesel, and other products derived from
crude oil.
b. The higher prices lead to a reduction in the quantity demanded in the U.S. market due to
the law of demand.

Impact on U.S. Producers:

U.S. oil producers may benefit from the higher global prices if they can sell their domestically
produced oil at the elevated world market prices.

Impact on Social Surplus:

I. Social surplus is the sum of consumer surplus and producer surplus. In this case, the
increase in the world market price reduces consumer surplus in the U.S. market due to
higher prices for imported oil.
II. However, it may increase producer surplus for U.S. oil producers who can sell their oil at
the higher global prices.

Government Intervention:
Governments may respond to the situation by considering policy measures, such as subsidies or
strategic reserves, to mitigate the impact on consumers and stabilize prices.

The net impact on social surplus in the U.S. market depends on the relative magnitudes of the
changes in consumer surplus and producer surplus. If the increase in producer surplus is
significant and offsets the decrease in consumer surplus, the overall impact on social surplus may
be less severe. However, if the U.S. is heavily dependent on oil imports and domestic production
cannot fully compensate for the supply shock, the overall social surplus may decrease.

It's worth noting that the actual impact on social surplus would depend on the specific
characteristics of the U.S. oil market, the responsiveness of consumers and producers to price
changes, and any government policies implemented in response to the supply shock.