3.2 Variations in Econ Activities-The Economics of Volatile Oil Prices

Oil prices have a very important influence on business costs because oil is a key input in the production process of many manufacturing firms such as chemical producers. Oil prices also have a significant influence on business costs because the price of oil affects transport costs. The last 5 years have seen extremely volatile oil prices with the price being as low as $21 a barrel in 2020 during the COVID-19 pandemic to as high as $122 in 2022 during the Ukraine conflict.

Using a diagram explain why there is a positive relationship between short-run aggregate supply and the average price level of the economy.

Explain two reasons why an increase in the price of oil affects business costs.

Using a diagram explain the impact falling oil prices would have on real GDP and the average price level of an economy that consumes a large amount of oil.