Elasticity

The End of Elastic Oil

We’re not running out of oil.  There’s still plenty of oil still in the ground.  Oil which was previously too expensive to exploit becomes economic with a rising oil price.  To the uncritical observer, it might seem as if there is nothing to worry about in the oil market.

Elasticity of demand

On the demand side, the elasticity of our demand for oil reflects the options we have to using oil for our daily needs. At a personal level, we can quickly cut our demand for oil a little bit by combining car trips, keeping our tires properly inflated. Over the longer term, our personal options to cut oil consumption increase.  We can move closer to work, or to somewhere where we can walk or use public transport to get to our job. This is why the most fuel-efficient vehicle is a moving van. Replacing a car with a more fuel efficient vehicle is an option for those who have money or credit, but the people who are under the most pressure from high fuel prices are unlikely to be able to afford such options.  If they can’t resort to ride sharing or public transport, they may simply lose their jobs because they can’t afford to get there.

In conclusion, the price elasticity has changed to inelastic. Since consumer pay less attention to oil price. And the graph would be:

Elasticity of supply

But there are also limits to the ability of oil supply to adjust.  Most OPEC nations, including Saudi Arabia, need at least a $100/bbl for oil to keep their budgets in balance,   In fact, as (subsidized and hence inelastic) OPEC domestic consumption continues to increase faster than supply, OPEC net exports will continue to fall, further raising the price needed to balance exporters’ budgets. Put simply, if the oil were quick and easy to get at, we’d have gotten it already.  All these factors mean that the elasticity of oil supply is falling, so oil demand has to adjust more in response to changes in price

A BETTER UNDERSTANDING OF THIS CHAPTER :

Price elasticity of demand   : The responsiveness of consumers to a price change is measured by a products price elasticity of demand.

Relatively elastic is where Consumers pay attention to price.For example, restaurant meals, phones and house. People compare prices and buy the best product. If a consumer wants to    purchases  a brand new handphone. And lets say Samsung and Nokia have a phone which contains the same elements and advantages. So the consumer will choose the best one and the one with low price.  Its because consumers generally wants things with maximum utility.

Relatively Inelastic is where Consumers pay less attention to price. For example, Toothpaste, junk foods and  in extreme condition. Consumers don’t really pay attention to price change for toothpaste and junk foods even pencils. It is because there is only less price change to those products.  Morever, in extreme condition like a patient is going to have an appendix operation. Even the price for the operation cost high. They wont take into account because it life matters.

In extreme cases

Interpretation of Ed.

1)      Elastic demand.

·         Specific percentage change in price results in larger percentage in quantity demanded.

·         Ed will be more than 1.

·          Example: . 04 ÷   .02 = 2

2)      Inelastic demand.

·         If a specific percentage change in price produces a small change in quantity demanded.

·         Ed will be less than 1.

·         Example:  .01 ÷ .02= .5

3)      Unit elasticity.

·         The case separating elastic and inelastic demand. Where the percentage are the same.

·         Ed is equal or unity.

·         Example:  .02 ÷ .02 = 1

Determinants of price elasticity

1)      Substitutability

·         The larger the number of substitute goods that are available, the greather the price elasticity of demand.  Example, The demand for tooth repair is inelastic because there are no close substitutes when those procedures are required.

2)     Luxuries v necessities

·         The more that a good is considered as luxuries rather than necessities the greater the price elasticity of demand.    Example, Electricity (necessity) – A price increase will not reduce the amount of lighting  and power used.  Luxuries- jewellery and vacation can be forgone.