Aggregate Demand and Supply

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Aggregate Demand and Supply
As a result of oil drop, most definitely, there are likely chances that the consumption level will increase. This is because a drop in oil prices not only attracts people to buy but also firms; foreigners and governments would want to benefit from the low rates. The aggregate demand will be affected as a result of consumption level rise. The people, firms, foreigners among others are components of the total market. Since there is a fall in the current oil prices, this results to significant productions output fall too as well as firms’ confidences falling thus they buy less oil for supply; therefore, a leftward shift on the demand curve is realized (Bjørnland, p.589). The fact that there is a rise in the consumption of fuel owing to the drop in oil prices does not mean that there is a shift of the aggregate demand but rather movement along the curve.
On the other hand, a drop of oil prices will result to the rightward shift of the aggregate supply curve. This is attributed to the fact that oil is cheaper currently thus cheaper for firms to produce hence they will have more production of oil at the same price. Yes, a drop of oil pieces favors the consumers a great deal; however, there is a downside as well. Fall in oil prices favors the importing countries while at the same time is bad news for exporters such as Nigeria, Venezuela or Iraq. Fall in oil prices hurts the countries revenues take for instance Norway who pride themselves in investing oil revenues.

There will be a drop in revenues from oil mining until the prices are regulated back.
Let’s assume that state’s industries rely on oil for a sound economy production. In that case, if prices for oil drop, the cost of production for industries and firms will decrease hence, there will be a positive supply shock.

Work Cited
Bjørnland, Hilde Christiane. “The dynamic effects of aggregate demand, supply and oil price shocks—a comparative study.” The Manchester School 68.5 (2000): 578-607.