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Exercise (AACSB) Analysis You just ran across three interesting statistics: (1) the world's current supply of oil is estimated to be 1.3 trillion barrels; (2) the worldwide use of oil is thirty billion barrels a year; and (3) at this rate of consumption, we'll run out of oil in forty-three years. Overcoming an initial sense of impending catastrophe, you remember the discussion of supply and demand in this chapter and realize that things aren't as simple as they seem. After all, many factors affect both the supply of oil and the demand for products made from it, such as gasoline. These factors will influence when (and if) the world runs out of oil. Answer the following questions, and provide explanations for your answers: 1. What's the major factor that affects the supply of oil? (Hint: It's the same major factor affecting the demand for oil.) 2. If producers find additional oil reserves, what will happen to the price of oil? 3. If producers must extract oil from more-costly wells, what will happen to the price that you pay to fill up your gas tank? 4. If China's economy continues to expand rapidly, what will happen to the price of oil? 5. If drivers in the United States start favoring fuel-efficient cars over SUVs, will gas be cheaper or more expensive? 6. In your opinion, will oil producers be able to supply enough oil to meet the increasing demand for oil-related products, such as gasoline? 20. EXPLORING BUSINESS Key Takeaways . In a free market system, buyers and sellers interact in a market to set prices. When the market is characterized by perfect competition, many small companies sell identical products. Because no company is large enough to control price, each simply accepts the market price. The price is determined by supply and demand. Supply is the quantity of a product that sellers are willing to sell at various prices. Demand is the quantity of a product that buyers are willing to purchase at various prices. The quantity of a product that people will buy depends on its price: they'll buy more when the price is low and less when it's high. Price also influences the quantity of a product that producers are willing to supply: they'll sell more of a product when prices are high and less when they're low. In a competitive market, the decisions of buyers and sellers interact until the market reaches an equilibrium pricethe price at which buyers are willing to buy the same amount that sellers are willing to sell