Elasticity in Oil Demand and Supply

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Questions and Answers

What does income elasticity of demand generally measure?

The responsiveness of demand to a change in income (correct)

The change in price over time

The average income level of consumers

The proportion of durable goods in the market

Which category does income elasticity of demand for luxuries typically fall into?

Greater than 1 (correct)

Equal to 1

Less than 0

Between 0 and 1

In the context of elasticity, how does the short-run price elasticity of supply generally compare to the long-run price elasticity of supply?

Irrelevant to demand and supply analyses

Equal in both short-run and long-run

Higher in the short-run

Lower in the short-run (correct)

Which of the following correctly describes the typical relationship between short-run and long-run price elasticity of demand for durable goods?

Long-run elasticity is greater than short-run elasticity Signup and view all the answers

How does the price elasticity of demand for non-durable goods typically behave in the short-run compared to the long-run?

Short-run elasticity is greater than long-run elasticity Signup and view all the answers

Which of these factors is NOT considered when analyzing income elasticity of demand?

Change in consumer preferences Signup and view all the answers

What indicates that a good is a necessity in terms of income elasticity of demand?

A positive income elasticity less than 1 Signup and view all the answers

What is the main difference between durable and non-durable goods regarding elasticity?

Non-durable goods have lower price elasticities than durable goods Signup and view all the answers

What would happen to the price of oil in the short run if oil production ceased?

Price would increase beyond $41.08 per barrel. Signup and view all the answers

What is the projected price of oil in the long run, given the demand and supply curves provided?

$21.75 per barrel Signup and view all the answers

Which of the following statements is true regarding the elasticity of supply and demand in the long run compared to the short run?

Long-run elasticity is less responsive to changes in production. Signup and view all the answers

In the short-run supply equation, what is the effect of an increase in oil prices on the total supply?

Total supply will increase for every unit increase in price. Signup and view all the answers

What distinguishes durable goods from non-durable goods in terms of income elasticity?

Durable goods have higher income elasticity than non-durable goods. Signup and view all the answers

Based on the projected short-run demand equation, what would the demand for oil be if the price is $40 per barrel?

D = 22.08 billion barrels/year Signup and view all the answers

When the total supply in the short run is calculated at $0.07P, what happens when the price approaches $25 per barrel?

Total supply will exceed 20 billion barrels/year. Signup and view all the answers

What are the primary measures one considers in price/consumption forecasting?

Elasticities of both supply and demand Signup and view all the answers

What is the long-run price elasticity of world demand for oil?

-0.40 Signup and view all the answers

Which of the following represents the short-run competitive supply price elasticity?

0.10 Signup and view all the answers

What is the total short-run supply equation given the assumptions in the data?

ST = 21.7 + 0.07222P Signup and view all the answers

What is the value of 'a' in the long-run demand equation?

32.2 Signup and view all the answers

If world consumption of oil is 5.5 billion barrels per year, what percentage of total world production does Saudi Arabia account for?

13% Signup and view all the answers

Which equation correctly represents the long-run demand for oil based on the elasticity provided?

D LR = 32.2 - 0.5111P Signup and view all the answers

What does the total long-run supply formula indicate about the competitive supply?

It is given by SC = 7.8 + 0.2889P. Signup and view all the answers

Which of the following statements is true regarding the price elasticity of competitive supply in the long run?

It is equal to 0.40. Signup and view all the answers

Which conclusion can be drawn about the demand curves based on the short-run and long-run elasticity?

Demand is less elastic in the long-run. Signup and view all the answers

Study Notes

Income Elasticity of Demand

Measures how much the quantity demanded of a good changes in response to a change in consumer income
For luxuries, the income elasticity of demand is typically greater than 1

Price Elasticity of Supply

In the short-run, supply is generally less elastic than in the long-run
Durable goods tend to have a more elastic price elasticity of demand in the long-run than the short-run
Non-durable goods tend to have a more elastic price elasticity of demand in the long-run than the short-run

Analyzing Income Elasticity of Demand

Supply is not considered

Necessities and Income Elasticity of Demand

Goods with an income elasticity of demand less than 1 are considered necessities

Durable and Non-Durable Goods

Durable goods tend to have a more elastic income elasticity of demand than non-durable goods

Oil Prices

The price of oil would likely rise sharply in the short-run if oil production ceased
The long-run price of oil is projected to be higher than the short-run price

Supply and Demand Over Time

Long-run supply and demand curves are generally more elastic than those in the short-run

Short-Run Supply

An increase in oil prices would cause a larger total supply in the short run

Durable Goods vs Non-Durable Goods

Durable goods are more affected by income changes

Short-Run Oil Demand

The short-run demand for oil would be around 4.0 billion barrels at a price of $40 per barrel

Short-Run Supply at $25 per barrel

At a price of $25 per barrel, the total supply would be $1.75 billion barrels.

Price/Consumption Forecasting

Primary considerations include price elasticity of demand, price elasticity of supply and income elasticity of demand.

Long-Run Oil Demand Elasticity

The long-run price elasticity of world demand for oil is -0.5

Short-Run Competitive Supply Price Elasticity

The short-run price elasticity of competitive supply is 0.07P

Short-Run Total Supply Equation

The short-run total supply equation is: 0.07P + 1.5

Long-Run Demand Equation

The value of 'a' in the long-run demand equation is -0.5

Saudi Arabia's Oil Production

Saudi Arabia accounts for approximately 12.2% of the total world production of oil

Long-Run Oil Demand Equation

The long-run demand equation is: Qd = 6 - 0.5P

Long-Run Total Supply Formula

The long-run total supply formula indicates that the competitive supply is perfectly inelastic.

Long-Run Competitive Supply Elasticity

The long-run competitive supply price elasticity is infinite.

Short-Run vs Long-Run Oil Demand

The short-run demand curve is less elastic than the long-run demand.

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Description

This quiz explores the concepts of income elasticity, short-run vs. long-run elasticities, and the impact of oil shocks on the global oil market. Additionally, it outlines the role of OPEC in controlling oil production and its effects on demand elasticity in both the short and long term.