Oil Price Elasticity

Define the price elasticity of demand for oil. If the demand for oil is price inelastic, explain (using appropriate diagrams) what happens both in the short-run and long-run if oil producers can come together to restrict the output of oil.

Introduction- In this essay I will explain what the price elasticity of demand for oil is and then further investigate what happens to the elasticity of oil in the short and long run as producers restrict the output of oil.

Main-

Para 1- Define the price elasticity of demand for oil. Use diagrams to show the demand curve.

Para 2-3- explain what happens to the price elasticity of oil in the short run if producers restrict output. (Not much change) diagrams

Para 3-4- explain what happens to the price elasticity of oil in the long run when output is reduced. Diagrams

Conclusion- Conclude everything said in the essay; the main points of each paragraph.

Resources- Lecture-4 mainly and possibly 123

Essay

In this essay, I will explain what the price elasticity of demand for oil is and then further investigate what happens to the elasticity of oil in the short and long run as producers restrict the output of oil.

Price elasticity of demand is a measure of how much the quantity demanded of a good, responds to a change in the price of that good. It is the percent change in quantity demanded divided by the percent change in price. Oil is price inelastic which means that the quantity demanded does not respond strongly to price change and the price elasticity is less than 1. The demand curve is always negatively sloped which means that price and quantity will change in opposite directions One change will be positive and the other negative making the elasticity of demand negative. (Lypsey and Chrystal).

[pic 1]

This diagram shows the demand curve for oil supply- the red graph. The graph at 2004 and 2008 are both steep so that as the price of oil supply increases, the quantity demanded will decrease at a much smaller proportion. The price inelasticity of oil can be explained because oil does not have any close substitutes. Therefore, if the price of oil supply were to increase, consumers do not have any choice but to continue buying oil at a higher price as there is no other alternative. A good that has close substitutes will have a more elastic demand. A good with few/no close substitutes, such as oil will have an inelastic demand.

(continue para 1, find more research online and in textbook to answer the question).

A durable product can usually be made to last for another year; thus, purchases can usually be made can be postponed with greater ease than purchases for non-durable products such as food and services. If enough customers decide simultaneously to postpone purchases of durables, even for six months, the effect on the economy can be substantial. This means that demand for durables are typically more price elastic in the short run than the long run. (Lipsey and Chrystal textbook).