Elasticity Case Study - the Price of Oil in Venezuela

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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.

Supply is the sum of all quantity of supply the firms in a market is willing to produce at a certain price. This makes up the supply curve, which can shift when the factor of production is altered. Demand is the sum of all individuals’ demand of a good/service at a certain price. This makes up the demand curve If the product is a normal good, the demand will vary directly with income. If the consumer’s preference is changed, the demand curve will be shifted.

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The price elasticity of demand for oil tends to be inelastic because oil is a necessity, therefore, there is no substitutes for the product because it is currently the most common fuel used in the world. Given that the events happened in a short period of time, PED becomes even more elastic because the consumers do not have time to consider other alternatives, or consider if they really need the product. 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, ...

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