Checking D&S

So, what happened?

Supply increased. US companies are producing more through fracking and there has been more oil coming out of the Middle East.

Supply has shifted right.  Increasing the equilibrium quantity and decreasing equilibrium price.

Supply right

 

Greater supply has been good for consumers but hurt many (but not all) individual firms who have seen their revenues fall.  Firms who incur the most cost in supplying or producing oil, such as fracking or sand extraction, will see their profits reduced the most.

Whether a firm exits the market or not is going to depend on their economic profits.  Economic profits takes into account alternatives for their capital and labor – what else could they be making or doing?  In some cases it is better to shut down then to run at a loss.

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