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Putin’s Economics

Apr 29, 2011 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Thinking Economically • 206 Views    No Comments

Our story begins during February when Russian Prime Minister Putin decided to freeze gasoline prices. Oil companies had a predictable response.

They left.

Following the money, they redirected their supply to higher prices elsewhere. The result? Russian gasoline exports were 40% higher than last year at the same time.

A second result? The Russians (almost) ran dry.

So now, the Prime Minister is banning exports during May for “high octane petrol sold at the highest prices.” Also, he is upping export duties and cutting local sales taxes.

The Economic Lesson

Demand and supply graphs continue the story. With price our Y-axis and quantity the X-axis, draw an “X” as the lines on your graph. The downward sloping line is demand and the upward sloping line is supply. Next draw a horizontal line below equilibrium, the point where the demand and supply lines meet. This line, called a ceiling (because it stops prices from rising), illustrates why we get a shortage. The distance between the point that the ceiling crosses supply and the point that the ceiling crosses demand represents the size of the shortage. A shortage is precisely what Mr. Putin created.

Now with export taxes, he is making supply more expensive. Then, typically, the supply curve shifts to the left and upward. And producers decide to supply less.

An Economic Question: The Prime Minister’s goal is to make consumers happy. Will he be successful? Hint: Think about price and quantity.

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