Economic Analysis - Assignment Sample

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
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Description of chosen scenario
In the Kuwait economy, Petroleum industry is considered as the largest industry. The
industry has significant contribution in the gross domestic product in the country. The nation has
an oil reserve of nearly 104 billion barrels. This constitutes 9% of the total oil reserve of world.
Supported by huge reserve of oil Kuwait ranks seventh in terms of oil production in world. The
excess of oil produced is exported across the world making it seventh largest exporter (Al-Sabah
2017). Owing to increasing energy demand the demand for crude oil has accounted an upward
trend. The consumption of crude oil in the middle-east nation especially in Saudi Arabia and
Kuwait has increased rapidly. The consumption of oil however depends on a number of factors.
Of them two important factors that are taken into consideration include price and income. The
consumption of a commodity generally adversely depend on price while income likely to
increase demand and hence consumption.
In order to evaluate response of consumption to income and price a multiple linear
regression is conducted. The proposed hypotheses are as follows
Hypothesis 1
Null Hypothesis (HA0): No statistically significant relation exist between price and consumption
of crude oil.
Alternative Hypothesis (HA1): A statistically significant relation exists between average price and
consumption of crude oil
Hypothesis 2

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Null Hypothesis (HB0): No statistically significant relation exits between consumption of crude
oil and that of average income
Alternative Hypothesis (HA1): A statistically significant relation exists between average and
consumption of crude oil
Influence of price and income on consumption of crude oil
Price is the most significant determinant of consumption. People adjust their consumption
on the basis of price. A high price generally discourage consumption while a low price
encourages consumption. The effect of price on consumption however changes depending on
nature of the product. Income by influencing purchasing power of people influences
consumption (Baumol and Blinder 2015). In order to model relation of oil consumption and price
and income following multiple linear regression model is framed
Consumption=a+ ( b∗income ) +(c∗price)
a:Constant
b:Coefficient of income
c:Coefficient of price
For income, real per capita income in considered. The yearly average price of crude oil is
considered as another independent variable.
From the multiple regression result the regression equation is estimated as
Consumption=389.4415− ( 0.0142∗income ) +(7.4311∗price)

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The overall explanatory power of the independent variables is determined from the R
square value. In case of multiple regression the adjusted R square is more relevant. The adjusted
R square is obtained as 0.92. The R square value closer to 1 indicates presence of a strong
correlation between dependent and independent variables (Keith 2014). More specifically, this
implies price and income together can influence 92 percent variation in consumption of crude
oil.
The coefficient of income is -0.0142. From the estimated coefficient it is therefore
observed that an inverse relation exists between price income and consumption. The elasticity of
crude oil consumption with respect to income is relatively small. With 1 percent increase in
income consumption of crude oil decreases by 0.01 percent. The p value corresponding to
income is 0.0000. The p value is statistically significant as it is lower than significant value of
0.05 (Wiley and Pace 2015). This in turn implies rejection of the null hypothesis that no
significant relation exits between income and consumption of crude oil.
The estimated coefficient of average price is 7.4311. The positive coefficient indicates
existence of a positive relation between average price and consumption. The price elasticity of
consumption is 7.4311. The regression results thus indicates that in Kuwait, consumption of
crude oil increases along with its price. The p value is obtained as 0.0000. The significant p value
(less than 0.05) again implies that a statistically significant relation exits between average price
and consumption.
Economic evaluation
Based on the multiple regression analysis, the null hypotheses of the both the framed
hypothesis have been rejected. From the first hypothesis, it is obtained that a statistically

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significant relation exits between price and crude of oil consumption. The second hypothesis
indicates implies existence of significant relation of crude oil consumption with that of price.
The relation between price and crude oil consumption is found to have a positive relation.
Crude oil is essential for everyday life. The oil price in middle-east is controlled by the
organization named Organization of Oil and Petroleum Exporting Countries (OPEC). The
organization often creates artificial shortage of oil resulting in a high price of oil (Friedman
2017). In the short run, people cannot adjust their oil demand. As a result, both price and
consumption increases simultaneously.
For income, an inverse relation is found to exit between income and crude oil
consumption. With increase in income people can afford alternative to crude oil or petroleum
product. They can then reduce their use of petroleum and switch to some other product (Rader
2014). This explains the inverse relation between per capita income and crude oil consumption.
Policy implication
The crude oil companies can use this consumption model to make their marketing
strategy. The positive relation between price and consumption may encourage them to charge a
higher price. Because people are unable to adjust their demand in the short run consumption
continues to increases. The high price along with high consumption results in higher revenue for
these companies (Nicholson and Snyder 2014). However, these companies should keep in mind
that higher income has a negative influence of oil consumption. With higher income people have
a tendency to switch their demand. This might hurt profitability of the companies.
The obtained relationship of oil consumption with income and price also has implication
for policymakers. People in the economy often suffers from a high oil price. The oil companies

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take the advantage of positive influence of price on their revenue. Hence, government should set
a price ceiling to protect the interest of common people (Hutchinson et al. 2017). The policy of
price ceiling sets a price well-below the market equilibrium price. The people thus can get their
necessary goods at a reasonable price.

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References
Al-Sabah, Y.S.F., 2017. The oil economy of Kuwait (Vol. 6). Routledge.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University Press.
Rader, T., 2014. Theory of microeconomics. Academic Press.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Cengage Learning.
Hutchinson, E., Nicholson, M., Lukenchuk, B. and Taylor, T., 2017. Principles of
Microeconomics. University of Victoria.
Keith, T.Z., 2014. Multiple regression and beyond: An introduction to multiple regression and
structural equation modeling. Routledge.
Wiley, J.F. and Pace, L.A., 2015. Multiple regression. In Beginning R (pp. 139-161). Apress,
Berkeley, CA.

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