Question

Price of oil in international markets has dropped stunningly 60% in the past twelve months. Among the factors mentioned behind this drastic fall is the millions of barrels of oil produced in the US called shale oil. Look at the supply and demand picture for this commodity and try to analyze its price action. Discuss the impact of price elasticity of supply and demand in the short and long terms.

Answer 1

Answer:

Elasticity of demand tends to be more price inelastic in the short run

In the long run, consumers become more aware of alternatives

Elasticity of Supply is the measure of the responsiveness in quantity supplied to a change in price for a specific good

Explanation:

Elasticity of Demand in  Short run

In the short run demand is likely be more inelastic (low = less than 1)

If people are used to buying a good, then when the price goes up, they will tend to keep buying it out of habit. However, when they realise the price rise is permanent they will expend more energy and time in looking for alternatives.

Elasticity of Demand in the Long-run

If the price of a good is expensive for a considerable time period, consumers looking to save money will start trying to find alternatives.

if the goods take a higher percentage of disposable income they may make large changes to their lifestyle.

Elasticity of supply in short-run

The short-run is such a period in which the fixed factors like plants, machinery , etc. cannot be changed. The firm can, therefore raise output by increasing the quantities of variable factors such as labour.

Elasticity of supply in the long-run

The long run supply of a perfectly competitive industry indicates the various quantities of a product offered at various prices. In the long run, the firms can change the existing plant and equipment and they can enter or leave the industry, so that price is always equal to both marginal cost as well as the minimum average cost (Price =LMC = LAC).