• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Elasticity Case Study - the Price of Oil in Venezuela

Extracts from this document...

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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. CASE STUDY OF OPEC

    MAXIMIZATION OF JOINT PROFITS IN A CARTEL The decision regarding the level of total output to be produced, the price at which this output will be sold and the allocation of output among various countries by OPEC can be explained with the help of the following diagram: In this diagram,

  2. case study economics

    Market equilibrium is when the market is in a stage where the demand meets the supply. For eg - In the figure below, we see that at price P1 the quantity Q1 is both demanded and supplied. Thus the market in equilibrium at the price P1 since the quantity of

  1. Economics Notes. Elasticity of Demand and Supply.

    If YED = -ve The goods are inferior goods. Demand decreases as income increases. People switch to buying goods which are branded. - Necessity goods have low income-elasticity since demand will not change much even if income rises. - Superior goods have high income-elasticity i.e.

  2. Price Elasticity of Demand

    In general like oil, plastic is unavoidable to us but if we look at some simple situations, there are some ways which consumers can avoid buying products related to oil/ plastics. For example, when price of oil goes up this also leads to an increase in plastic bags provided by the shops.

  1. Markets and Price Determination

    The conditions of demand are 'all other things' that are assumed equal in the law of demand. Conditions of demand include: Condition of demand Increase in demand Decrease in demand Taste and fashion (e.g. clothes, music) Good comes into fashion or enjoys successful advertising to boost demand.

  2. Explain how interdependence and uncertainty affect the behavior of firms in the oligopolistic market

    A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account is called a strategic choice. Here is one major term the important factor of all predictions and actions.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work