Post 1

The Impact of The Increase in Supply Domestic Natural Gas and Oil from The Fracking Boom on Aggregate Supply

Innovative technologies often have tremendous positive impacts on various aspects of life and the economy. One significantly impactful innovation is Fracking. Fracking, as noted from various sources, is the extraction of oil using chemicals and water delivered in high-pressure by hydraulic technology (National Geographic: Hubbard and O’Brien 592). Fracking is more effective at extracting oil compared to traditional methods used before its discovery. One of the direct effects of the invention was an increased supply/production of oil and natural gas in the United States between 2008 and 2015 (Hubbard and O’Brien 592). Given that oil and natural gas are significant inputs of production in the American economy, their increased supply not only had an impact on their prices, which reduced, but also on other sectors of the economy including manufacturing, transportation, as well as employment. For instance, the increase in supply of oil and natural gas spurred manufacturing, and employment and reduced transportation costs leading to an increase in overall economic output of the country.

The impacts of fracking on various aspects of the economy can be well expressed through the aggregate supply curve. Taking oil and natural gas alone, the increase in supply results to a shift along the short-term aggregate supply curve with both real output and price of the commodities increasing. On the other end, the reduced cost of production resulting from the increased supply of the commodities shifts the curve to the right. This is whereby the real output increases while price stagnates. With regard to the long-term aggregate supply curve, the curve shifts to the right as a result of the increased supply of oil and natural gas and its impact on production and productivity. The increase in supply bolsters production and productivity thus increasing potential GDP and thus Shifting the LRAS to the right.

Post 2

Impact of Oil and Natural Gas Supply Increase on Price

Ideally, it is often assumed that an increase in the supply of a product, particularly when it exceeds demand, results in a drop of its price. With the increase in oil and natural gas supply that is the case; prices for the commodities reduced upon an increase in their production (Hubbard and O’Brien 592). Given the vast demand and use of oil and natural gas in the economy, the price drop also stretches to other parts of the economy. For instance, production costs drop. Such a drop helps increase production with manufacturers having a larger capacity to make more products. As a result, the aggregate supply curve shifts to the right with more output being realized at lower costs.

Post 3

Impact of Fracking on Aggregate Demand

Demand and supply go hand in hand. What is supplied is meant for use by those who demand and consume it. As noted, the increase in supply of oil and natural gas leads to reduced production costs for various oil and natural gas-intensive products which are felt by consumers through reduced costs. The reduced costs of commodities allow consumers more saved income which can then be disposed by consuming and demanding more. As a result, there is an increase in aggregate demand up to a point where both aggregate demand and aggregate supply are in equilibrium.