Effects of Rise in Oil Prices in the Middle East

Running head: ASSIGNMENT 1
ASSIGNMENT 1
Student Name
Institutional Affiliation
Facilitator
Course
Date

ASSIGNMENT 2
Question1
a. Effects of a rise in oil prices in the Middle East
i. Demand for automobiles
Automobiles and oil are complementary goods since they are consumed together.
Automobiles use oil in their operations. An increase in oil price decreases the demand for the
automobiles and this shifts their supply curve to the left (“Ahmadian et al, 2013”) as shown.
ii. “Demand for home insulation”
Some home insulation materials are made from oils such as foam which is made from
petrochemicals. When the price of oil increases, the price for the materials made from oil for
home insulation increases. The demand for home insulation decreases as the home insulating
materials become expensive. This shifts the demand curve for home insulation to the left as
shown.

ASSIGNMENT 3
iii. Demand for coal
Oil and coal are close substitutes. An increase in the price of oil will increase the demand
for coal. This means the demand curve for coal will shift towards the right direction as shown.
iv. Demand for tires
Tires are made from synthetic rubber which is manufactured from oil. Oil price increase
increases the price for tires and hence decreases their demand (Fouquet, 2012). This shifts their
demand curve to the left as shown.

ASSIGNMENT 4
v. Demand for bicycles
An increase in the price of oil will increase the transport costs. People who use public and
private transport shift and start using bicycles for transport. This increases the demand for
bicycles and their demand curve moves towards the right as shown.
b.
Externalities refer to costs and benefits to parties who did not choose to incur them
(Palmquist, 2018). External costs also referred to as negative externalities, cause negative effects
to third parties. The presence of external costs makes utilization of resources inefficient. This is