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PATHWAYS WORLD SCHOOL, INDIA

IB ECONOMICS - COMMENTARY COVERSHEET

COMMENTARY NO._________

CANDIDATE NAME:

GOBIND SINGH DHINGRA


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CANDIDATE
NUMBER:

TEACHER:

TITLE OF EXTRACT:

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SOURCE OF
EXTRACT:
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DATE OF EXTRACT:

WORD COUNT:

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DATE THE
COMMENTARY WAS
WRITTEN:

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SECTIONS OF THE
SYLLABUS TO
WHICH THE
COMMENTARY
RELATES:

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_____ 1. Introduction to Economics

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2. Microeconomics

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3. Macroeconomics

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4. International Economics

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5. Development Economics

Oligopoly market structure has imperfect competition where exists few firms in
highly competitive industry. Each firm has enough market power to prevent its
being a price taker, also each firm faces enough inter firm rivalry to prevent it
considering the market demand curve as its own. These oligopoly firms are
generally strategic in nature which means they think explicitly before taking and
implementing any course of action. Thus, it is agreed that if the firms of oligopoly
market structure would work in groups as co-operative, they will be able to
generate more profit. Real world example of oligopoly is OPEC1 (Organization of
petroleum exporting countries). It was created in 1973 with groups of countries to
restrict the world total output. At that time OPEC countries were accounted for
more than half of total world output. OPEC succeeded in 1980s because of
following reasons:
i)
OPEC members were accounted for large part of total world supply
ii)
Other non-members countries could not able to increase their output
much quickly with rise in price.
iii) World demand for oil and energy was highly inelastic as shown in below
diagram:

In above diagram, the curve SN depict the non-OPEC supply curve of oil. Price
was Pw and OPEC was able to supply Sw. This resulted in increase in price to Pw

http://www.opec.org/opec_web/en/about_us/24.htm

from Pw. Output increase to Q3 from non OPEC and Q2 Q3 from OPEC. OPEC
enjoyed high profit.
Later in long run OPEC faced a different market reaction towards its policy both
from demand as well as supply side.
Increase in world supply: In 1973, OPEC was accountable for more than half of
world output, but increase in supply from non member countries as reaction to
increased price, lower down its output to less than half in 1979. In 1985 OPEC
share remained merely one fourth. Thus, to maintain its profit at given price,
OPEC members have to decrease supply more.
Decline in world demand: although energy resources and oil resources demand
curve are inelastic in short run. But, in long run, people tend to develop new
technology and cheaper sources of energy. Thus, after 1980s, OPEC faces a high
elastic demand curve for its oil output.
Cheat among the members: As non members increased their output as reaction to
increased prices, share of OPEC members in income decreases. Thus, members of
OPEC violated their quotas in order to earn high income.
Given article talks about the decision made by Indian government to decontrol oil
price and let the oil distributing companies to set their oil price monthly depending
upon OPEC oil price fluctuations. This process can be explained with below
diagram:

D and S represents domestic market demand and market supply respectively with P
as equilibrium price of oil and Q as equilibrium quantity. OPEC oil fluctuation
which raises the price of crude oil per barrel shifts the supply curve of Indian
suppliers to left at S1 depicting suppliers are now willing to supply less at higher
price P1 (because of high cost). However, consumers are willing to buy more (due
to increasing population and necessity of oil) will shift the demand curve rightward
to D1. The intersection of D1 and S1 formulates new equilibrium at e2 with P2 as
equilibrium price which is much higher than before.
Data given in the article depict the volatility of crude oil. To maintain its profit,
OPEC is trying to stabilize its prices so that it can earn enough profit at prices
which is acceptable by consumers to avoid further fluctuations. OPEC can do so by
restricting its output and making changes in its quota. OPEC is following a
strategic approach, which will work in both long run and short run. It has been
agreed that all members of OPEC will proportionally cut down the output in order
to save its profit erosion.
Further, article talks about Indian oil market, where despite of low import
rate of $99 per barrel, Indian oil companies are facing losses. The reason for the
lose is that Indian oil companies have to face higher cost price and low selling
price. Although, import rate has been decline but at the same time government is
cutting petroleum and diesel prices which are fetching less revenue for the
companies. Thus, it has been recommended that further cut in prices will not be
feasible for the economy. Hence, government has decided to decontrol its oil price.
http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRLTS8yMDEwLzA2LzMwI0FyMDA4MDA=&Mode=Gif&Locale=englishskin-custom

bibliography
1. http://www.opec.org/opec_web/en/about_us/24.htm

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