The Demand and Supply of Oil

The Demand and Supply of Oil

  • Submitted By: muniza
  • Date Submitted: 03/19/2009 10:30 AM
  • Category: Book Reports
  • Words: 1260
  • Page: 6
  • Views: 537

Q1. How do the demand and supply of oil behave differently in the long run and the short run?

In the short run, the demand and supply of oil is inelastic. So even if the prices increase the demand does not change too much. The reason for this is the time period given to consumers to respond to the change in price. Since it’s the short run, it obviously means that people cannot immediately change their lifestyle and find suitable alternatives. Therefore in the short run the demand and supply of oil is inelastic. The reason for the supply to be inelastic is that oil is a difficult source to extract and even if there is an immediate need in the market for oil, which cannot be supplied immediately.

In the long run the situation is exactly the opposite. Both the demand and supply are now elastic and any changes in price may lead to huge changes in demand. In the long run, if suppliers try to increase the price by decreasing the supply of oil, they may not succeed. They can easily alter the supply of oil in the long run, but keeping in mind that even the demand is now as elastic as the supply, people can easily stop consuming oil causing the high price to be ineffective. In the long run, people have had more then enough time to change their habits and consumption levels of oil. They can use more fuel-efficient cars or switch to public transport on order to overcome the high prices of oil. Usually high prices of oil come down again when too many investors enter the market initially attracted by the high prices. That way the supply increases too much and the price then falls bringing the market back to the equilibrium.

This is how the demand and supply of oil behave differently in the short run and the long run.
Q2. Assess the market structure for oil. How far is the cartel successful?

The oil market comes under the market structure of an oligopoly. The term denotes a situation where there are few sellers for a product or service. The members of an oligopoly...

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