Elasticity
Everyone LOVES Oil
"Price elasticity" is a measure of how people
react to rising prices. A high number means they cut back sharply when prices
rise while a low number means they just suck it up and keep buying. So what's
the elasticity of oil prices? This is important, because it tells us, for
example, how people react to higher taxes on gasoline. WHAT WOULD THEY DO?
Will they use less and find other ways to get around? Or keep burning the stuff and figure out other sources to cut back?
Oil falls under necessities. Oil has few substitutes, an inelastic factor, a longer time period for adjustment, an elastic factor, and depending on income it can be a cheap good or an expensive good.The factors for a product to have inelastic demand curve is usually fewer substitutes, the product is considered a necessity, it has a short time period for adjustment, and is a cheaper good relative to income.
Few substitutes for oil and
gasoline exist, and as such, demand for these goods is relatively inelastic. Low price elastic demand is commonly associated with
"necessities," although there are many more reasons a good or service
may have inelastic demand other than the fact that consumers may
"need" it.
Stuart Staniford draws our attention to the latest estimates from the IMF,
and as he says, they're pretty eye popping. Here's the table:
Take a look at the bottom row. "Non-OECD" means poor countries,
and the IMF figures that short-term price elasticity in poor countries is
-0.007. This means that a 1% increase in price leads to only a 0.007% decrease
in consumption. Put another way, even a 50% increase in price leads to only a
negligible 0.35% decrease in consumption. Long-term elasticity is
higher, but even here a 50% price hike would lead to only a 1.8% decrease in
consumption.
(Source :http://www.motherjones.com/kevin-drum/2011/04/raw-data-everyone-loves-oil)
Written by : Ng Pui Yan 0313660
Very informative and interactive post..Good job =)
ReplyDeleteImpressive article on elasticity. Very detailed and thorough with facts. Also, superbly well decorated and pleasant to the eyes. Two thumbs up !! =)
ReplyDeleteLOVE the table on oil demand price and income elasticities. You've back up your article with cold hard facts !! Amazing to say the least ! I've got a question though. What other goods are inelastic similar to oil?
ReplyDeleteHi Andrew!Generally, most necessities are inelastic. Goods such as rice,bread and flour are good and common examples.
Deletenice pic and diagrams btw :)
ReplyDeleteAmazing how we've come to be so dependent on oil that it now falls under the category of necessity. The writer of the article is very well learned! 5/5 stars in my book. Cheers !
ReplyDeleteWell done.. !:)!!! Very informative!
ReplyDeleteNice and interesting blog !! :)
ReplyDeleteYour passage helped me in understanding elasticity much better! very detailed explanation you have there! good job! :)
ReplyDeleteRecently, hybrid cars that rely more on electricity instead of petrol are getting more popular. Will it have any effects on the demand for petrol?
ReplyDeleteHi Alice Potter! Yes definately. Hybrid cars act as substitutes for petrol. As a result, the demand of petrol will fall as the popularity of hybrid cars increases.
DeleteNice article! it is very informative and the example you provide are clear and easy to understand
ReplyDelete