Microeconomics assignment 3
Demand for oil elasticity occurs when there is a rapid change in ultimatum for fuel products with respect to price fluctuations. Several factors can be attributed to this phenomenon of elasticity demand for oil. For instance, existence of close substitutes for fuel such as natural gas and solar panels. If people progressively opt to buy vehicles which consume alternative sources of energy other than petrol, a slight change in the price of the commodity will adversely affect its demand. In addition, if the general levels of income for majority of the nations in the world continue diminishing, then a substantial elasticity of demand for oil will take place. Further, the federal government can take several policies to make demand for oil more elastic. For instance, the government can decide to subsidy the prices of close substitutes of oil such as hydrogen, natural gas and solar panels to incentivize people to consume them, thus increasing elasticity of demand for oil. Besides, it can increase taxation of personal incomes as a strategy destined to lower the disposable incomes of the general public such that an insignificant fluctuation in prices for products like oil will substantially affect their demand (Hirshleifer, Glazer, & Hirshleifer, 2005).
In the short term, OPEC has substantial impact on the general prices of oil. However, in the long run the aptitude of OPEC to alter the oil prices is somewhat limited. This occurrence can be linked to the fact that individual countries have diverse incentives as opposed to this organization as a whole. For instance, if the OPEC nations are not satisfied with the prevailing oil prices, it is in their importance to reduce supply so that prices can skyrocket. Demand for oil tends to be more sensitive to price fluctuations in the long run than in the short run. When the prices of this product increases, the number barrels demanded falls slightly in the short run and thus within the first few months the demand for oil may be noted to be very inelastic. On the other hand, in the long run, demand for oil tends to be more sensitive to price changes (Case B7).
References
Hirshleifer, J., Glazer, A., & Hirshleifer, D. A. (2005). Price theory and applications: Decisions, markets, and information. New York: Cambridge University Press.
