Business economics Essay Example | Topics and Well Written Essays - 3000 words - 1

Business economics - Essay Example In order for the law of demand and supply to hold, there is an assumption that everything else remains constant. This paper aims at studying the economic problem of scarcity, in reference to oil prices. It will further address the externalities arising from oil usage and the government intervention. In economics, scarcity is a fundamental issue and requires that economic units make a decision of how much and what to produce using the limited resources. According to Watkins’s (2006, pp. 508-514) study, the scarcity of oil and the eventual decision made by economists give rise to a constant opportunity cost. To address this problem of scarcity, economists have been increasing prices on the scarce resources with a view to discouraging demand and encouraging firms to develop alternatives. According to Asdorian’s (2011, p. 97) analysis, the scarcity of oil rises where its supply falls short of the demand level. Whenever the supply fails to meet some demand at a prevailing price, the economics make prices to skyrocket in order to encourage supply and ration the demand. To get the aspect of oil scarcity, market prices are considered. The market price of oil reflects the opportunity cost incurred in bringing an additional barrel to the market. The opportunity cost compensates the reserve owners for the extraction costs and the loss of a barrel of reserves that could otherwise be sold in the future. Asdorian’s (2011) research findings revealed that whenever the price of a commodity is higher relative to that of other commodities, there is an indication of scarcity, whereas a lower price indicates abundance. The presence of scarcity is also seen when prices change over long periods. From the commodity extraction models, it is deduced that the market prices are relied upon as a reliable guide to opportunity cost that includes the costs that are relative to the expected future scarcity. Asdorian’s (2011) study, however, explains