Price Elasticity of Demand in Global Oil Market
There has been a constant and sharp decrease in the price of crude oil in the market. During January 2015 to March 2015, the price showed an upward escalation as highlighted by the blue arrow. Again since March 2015, the price of crude oil showed its trend of decline in price as highlighted by the red arrow
the demand for crude oil moved into opposite directions in reaction to the price of oil. The basic economic theory of demand is being highlighted by the interaction of crude oil price and quantity. According to this theory there exists an inverse relation between the quantity demanded and price of any goods and service in the market provided the good or service is normal in nature (Rios, McConnell and Brue 2013).
Price elasticity of demand of any goods and service has always been defined as the ratio between the percentages of price change and also that of quantity demanded (Sowell 2014). According to the question, the oil market has faced a decline in the price of crude oil by 30% within the last 6 months of 2015. In correspondence with this change in price the quantity demanded increased by only a negligible volume of 2%. Hence the price elasticity of demand as shown by this change
Hence, it can be stated that the crude oil is inelastic in nature as even when the price fluctuated by a huge percentage the resultant impact on quantity demanded was very less.
No, I do not agree with the writing of the source 1 upon the topic price elasticity of demand. According to the source, it is the commodities like crude oil that dictates the elasticity of demand of any goods and service. The concept of elasticity has cropped up to measure the interaction and responsiveness of demand of any commodity and price of the same due to changes in either one of them (Baumol and Blinder 2015). Hence, the elasticity of any goods can estimate the extent to which its demand may vary as the price varies.
It has been observed that commodity define the price elasticity of demand. Rather it can be said that the nature of goods determine the extent to which its demand might change when the price fluctuates (Cowen and Tabarrok 2015). But again as crude oil is an essential commodity and helps in transportation, acts as a fuel and so on, the rise or decline in price creates a ripple effect in the price of almost all the commodity in the global market. Hence, rather than the commodity itself, it is the nature of the goods and the availability of substitute play an important role in determining the elasticity of demand. As crude oil, the most essential commodity in global market does not have a proper substitute, so fluctuation in price of this commodity does have an impact in overall demand and supply of goods in the economy.
I would prefer to leave things in respect of free hand and let the demand and supply interact amongst them to restore equilibrium in the global oil market. In respect of the question, I would suggest them to keep the price of crude oil as low as possible for them. The reason for suggesting this action is given as follows:
Price Elasticity of Supply in Global Oil Market
I) Crude oil is the most important source of energy, the rise in price would adversely impact the entire global economy by creating an upward trend in the price of all other commodity. Hence, if the producer keeps the price of this commodity as low as possible, the demand of this commodity is going to increase and also the price of other commodities is expected to be low (Goodwin et al. 2015).
II) Again if the price of crude oil is kept low, the producer can still earn profit by maximizing their volume of sales whereas if the price keeps on rising, the emergence of other sources of energy like shale oil is going to emerge.
According to the article from source 2, it is clear that within a decade after the start up of shale oil production, there has been a huge increase in the production. Earlier trends had shown a decline in the production of oil in the long term. But it has been observed that the price of crude oil showed a consistent decline. Within a span of 10 years the production volume shoots up to 78%. It can be stated that supply of shale oil is elastic in nature. Mathematically, elasticity of supply can be written
In our scenario, the drop in oil price and the increase in production of shale oil go hand in hand. The quantity supplied changed by 78% whereas the price changed by 30% only and can be said that the ration is going to be greater than 1. Hence, it can be said that shale oil has elastic supply.
The supermarket industry in Australia is of oligopolistic in nature. Few supermarkets namely Coles, Woolsworth, Aldi and IGA capture and cater to almost 98% of the total needs of Australia. According to the theory of market, the market can be broadly classified under few sections, namely perfect, monopoly, oligopoly and monopolistic competition.
Oligopoly market is the one where few sellers dominate the entire market and there exists high level restriction in either entry or exit of firms in the market. In Australia, the above mentioned 4 supermarkets capture the lion’s share of supply. Hence, Australian supermarket can be categorised under oligopoly market (Phillipov 2016).
No, a price war in the interest of either Coles or Woolsworth is not justifiable. Indeed a price war often results in a loss of welfare within the economy and the small scale farmers are deprived where as the large scale farmers are forced to operate in accordance with these supermarket giant’s instruction (Nava 2015).
Under the oligopoly market, Coles and Woolsworth has almost 80% of the market share. Hence, they can operate like duopoly and decide upon their pricing by studying out the reaction function of its opponent. Then it can set the price of their goods at the kinked portion of their respective demand curve which is going to be considered as their reaction function (Price 2016).
In our scenario, the drop in oil price and the increase in production of shale oil go hand in hand. The quantity supplied changed by 78% whereas the price changed by 30% only and can be said that the ration is going to be greater than 1. Hence, it can be said that shale oil has elastic supply.
The supermarket industry in Australia is of oligopolistic in nature. Few supermarkets namely Coles, Woolsworth, Aldi and IGA capture and cater to almost 98% of the total needs of Australia. According to the theory of market, the market can be broadly classified under few sections, namely perfect, monopoly, oligopoly and monopolistic competition.
Oligopoly market is the one where few sellers dominate the entire market and there exists high level restriction in either entry or exit of firms in the market. In Australia, the above mentioned 4 supermarkets capture the lion’s share of supply. Hence, Australian supermarket can be categorised under oligopoly market (Phillipov 2016).
No, a price war in the interest of either Coles or Woolsworth is not justifiable. Indeed a price war often results in a loss of welfare within the economy and the small scale farmers are deprived where as the large scale farmers are forced to operate in accordance with these supermarket giant’s instruction (Nava 2015).
Under the oligopoly market, Coles and Woolsworth has almost 80% of the market share. Hence, they can operate like duopoly and decide upon their pricing by studying out the reaction function of its opponent. Then it can set the price of their goods at the kinked portion of their respective demand curve which is going to be considered as their reaction function (Price 2016).
Yes, with significant increase in technology the farmers can reduce their cost of production as shown by the blue coloured curve in figure 6. Hence, even in the price war when they receive low price for their goods they can sustain their production level with minimum or no profit. It is expected that with decreasing cost of production the farmer now do not need to go out of business.
The diagram above shows that after advancement in technology the cost of production decreases to P1 from P and thereby expected that farmer might be able to sustain in business. Also, with advanced technology he can produce more goods and thereby expect to earn profit.
References:
Askar, S.S., 2014. The impact of cost uncertainty on Cournot oligopoly game with concave demand function. Applied Mathematics and Computation, 232, pp.144-149.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.
Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave Macmillan.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Principles of Economics in Context. Routledge.
Nava, F., 2015. Efficiency in decentralized oligopolistic markets. Journal of Economic Theory, 157, pp.315-348.
Phillipov, M., 2016. ‘Helping Australia Grow’: supermarkets, television cooking shows, and the strategic manufacture of consumer trust. Agriculture and Human Values, 33(3), pp.587-596.
Price, R., 2016. Controlling routine front line service workers: an Australian retail supermarket case. Work, employment and society, 30(6), pp.915-931.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Sowell, T., 2014. Basic economics. Basic Books.
Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business Media.
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