Impact of Energy Cost Research Paper Example | Topics and Well Written Essays - 500 words

Impact of Energy Cost - Research Paper Example Note that various industries such as manufacturing, transportation, and fishery among others are oil-intensive. In this regard, an increase in the pump price of petroleum products would push up their production cost. This translates to an upward shift in the aggregate supply curve from AS1 to AS2, wherein higher price is seen. This condition proves that in the event of energy cost uptrend, increase in inflation is highly likely. Such is especially applicable to oil dependent nations which are extra sensitive to the volatility in energy cost. When energy costs increase, the prices of final output rise to recoup higher production cost incurred. With this, rising inflation occurs. As mentioned in the article, subsidy on high crude prices is unsustainable as it weighs down government budget. As such, Indonesian and Thai governments lifted such subsidies and allowed firms and consumers to fully absorb price increases instead. The elimination of subsidies is comparable to increasing net taxes because essentially it decreases deductions in taxes. This results in the downward shift in the income function as rising energy cost reduces consumption given a particular marginal propensity to consume (MPC), from AE1 to AE2. Relative to this, AD curve shifts downward from AD1 to AD2.