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Elasticity Case Study - the Price of Oil in Venezuela

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Introduction

Due to the strike against President Hugo Chovez, the supply of oil decreases. Snowstorms also cause the demand for the fuel to increase as well, thus increasing the price. The uncertainty of the political situation may as well cause the supply to fluctuate at any time. Price elasticity of Demand (PED) is the responsiveness of quantity demanded to a change in price. This determines how much consumers' market demand is affected by price. Price elasticity of Supply (PES) is the responsiveness of quantity supplied to a change in price. This determines how much firms are willing to change the quantity of supply when the signal of the price is changed. ...read more.

Middle

This means that the consumers are willing to pay for the product at any price. The price elasticity of supply for oil(PES) tends to be inelastic as well, as we can assume that it is being produced in its full capacity and the time period is short, and firms do not have the ability to change the quantity demanded for such good is a short period of time. Oil also does not have many substitutes, and firms have little flexibility to change their production pattern. The increase in price of oil is primarily caused by 2 factors, a shift in demand for oil due to snowstorms in the United States and the strike in Venezuela. ...read more.

Conclusion

The increase in demand would cause the equilibrium price to increase significantly compared to the increase in supply. This is due to the inelasticity of demand. However, when the supply curve shifts to the right, the price decreases as well. Conversely, this would cause the equilibrium quantity to decrease, due to the inelasticity of supply. Overall, the price decreases significantly, while the quantity of oil in the market is likely to change slightly, but the direction is ambiguous. Although current political standpoint of the United States does not affect the oil market, the price and quantity and change significantly if war is declared. More oil would be demanded, thus raising the price. Overtime, the supply would increase as well, and the curve would be more elastic, as the firms have more time to increase their production capability, this would cause the price to slowly decrease. ...read more.

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