How one change in oil will affect us all.

Oil is the blood of our nation, and to some extent, our world. Without it, our standard of living would be significantly altered, for the worse.

That is why, when one of the big producers of oil will be boycotted, consumers will be the ones punished.

Barack Obama has made the sanctions on iranian oil even stronger. He has completely stopped buying iranian oil, and is putting more pressure on other countries in an attempt to force Iran to give up its nuclear program. Basically, he is forcing countries to choose between importing oil from iran, or doing business with the US.

China, one of the biggest consumers of oil, has decided not to boycott Iran, believing that the US does not have a right to punish other nations like that. This should be a relief in oil prices; it should reduce the amount of demand overall, which would help the prices a small amount because china is such a big consumer of iranian oil. All the other countries have cut down on oil importation from iran, or completely stopped importing oil, under the threat of sanctions from the US. China just isn't scared of us.

Analysts are expecting a 20% spike in oil prices. This spike can be explained by a simple demand/supply graph. If the demand remains constant, and the supply curve shifts to the left, the prices will increase. In this case, the 2.2 million barrels of oil decrease in oil will result in a 20% increase in prices for consumers. To make up for this, the federal government is trying to pump more oil out of Saudi Arabia and tap into reserves, but doing these two things would mean that in the account of any other reason for shortage, we would be in a lot of trouble.

All us consumers can do is hope that the US forgives Iran soon.

Source: U.S. tightens oil sanctions on Iran: http://money.cnn.com/2012/03/30/news/international/Iran-sanctions/?npt=NP1

Economics in action

The relationship between retailers and shoppers is an interesting one: the retailer sets prices but the shopper chooses whether or not they want to buy. Although the retailers do have a choice in what their starting price is, Mr. Vineburg and many others believe that the ultimate price it is sold at is exactly what customers want. Ultimately, they will not be willing to buy it at a price any higher than what they buy it at.

This can be shown on a demand curve. The marginal benefits for different customers seem to be in a very narrow range. If the price is too high, the demand will be very low. However, after it reaches a certain price, the demand curves slope will alter and the demand will increase.

This is a new belief. Before, companies used to have very high starting prices, making it down when nobody was buying it. Many companies are trying out a new plan, including J. C. Penney. Rather than starting at a high price, they start at a fair price, eliminating sales. This strategy has not been very successful so far, but Mr. Johnson, the CEO of JC Penney, believes that not enough time has passed to make a definite conclusion.

There is more to it though; other experts, believe it to be more than just simple supply and demand.

Customers love a good hunt for a bargain. We cannnot definitely say that the optimal price is x, because one of the factors which determine the ultimate price is the challenge itself. This is an example outside a classroom, and there are many things that will decide how likely a customer is to buy something other than just price.

Only time will tell if Mr. Johnson on the experts are right. He still firmly believes that customers will buy if it is a good price to begin with.

Source: New York Times: "knowing cost, the customer sets the price"