ELASTICITY OF SUPPLY AND DEMANDS

Abstract
This papers illustrates the elasticity of demands and supply due to fall in prices of oil in
international markets. The papers also describe the laws of demand and supply. The papers also
provide the behavior of consumer and seller when decrease in prices of oil.
Keyword: Demand, Supply, elasticity of demands and supply.

ELASTICITY OF SUPPLY AND DEMANDS

Elasticity of Demand and Supply in International market due to decrease in Prices

Economics is the study of science that related to the answer of how society uses its scare
resources efficiently in order to fulfill the unlimited wants of the people by use of the alternatives
choices (Guell, 2012). Economists concern to importance subject such as law of demand,
demand determinants, the law of supply, supply determinants, market equilibrium, factors of
production, the firms, gross product, inflation and unemployment in order to gain benefit in the
society. The law of demand is the study of relationship between the buyer need and able to
purchase product or service at the market prices. The law of demands states that if the prices of
product, service or resources are charged lower than the quantity demand per unit of time for
these product will be higher and vice-versa (Economics, 2009). Similarly, Supply is the
relationship between the price of a product and the number of units of product that producers are
willing to offer for sale per unit time (quantity supplied), remaining all other relevant factor
remain same (supply, 2008). The law of supply states that higher the prices of goods or services,
the higher the supply of goods or services. Market equilibrium is the point where buyer want to
purchase the product at the price the seller wants to sell it. The analysis of study of demand and
supply may be understood through crude oil and shale oil.
The analyst found that price of oil in international market extremely dropped by 60%
since last twelve months. Some researcher views that the millions of barrels of oil produced in
US are one of the causes to drastic fall in the price of oil in international markets. Others view
that conflict between Saudi Arabia and Iran leads Iran to produce more oil per barrel than Saudi
Arabia in order to overcome its international market. Some analysts also say that Saudi Arabia,
the United Arab Emirates and other gulf allies arent willing to cut product to increase prices in
views that these countries do not loss its share market and merely benefit their competitors

ELASTICITY OF SUPPLY AND DEMANDS

(Krauss, 2016). The increase in production of oil affect whole economy of the middle-east
countries and other countries who earn remittance from these countries.
Look at the figure below the relationship between demand and supply curve that affected
by drastic fall in the price of oil in world market.
S
Prices
S1

P
P1

D
O

Q Q1 Quantity demand of oil

In the graph, the more supply of oil in market shift the supply curve to the left side along the
demand curve and decrease the price from previous equilibrium. In other words, equilibrium
shift to right sides along the demand curve as shown above.
The elastic of demand in short terms
In this commodity, the decrease in prices of oil creates inelasticity of demand in short
terms. The people using alternatives transportation dont directly use vehicles that run by oil. It
means that some people loving to use hybrid car for work does not use fuel car. In other words,
prices decrease by 60% in oil increase in fuel vehicles less than 60% in short run.

ELASTICITY OF SUPPLY AND DEMANDS

Prices

P
P1

D
O

Q1

Quantity demand of oil

Elasticity of demand in short run

The elasticity of demand in Long run
In the long, the demand of oil looks as elasticity, the decrease in the prices increase the
consumption rate of oil for fuel vehicles. The people who uses fuel at high prices use more fuel
and drive in their own private car frequently. The low income people who go to offices by public
transportation, interest and buy their own car and motorcycles and used it for their daily works.
Other people who shift to other alternatives for energy also use fuel to run generator for
electricity and perform their daily activities. They less like to use solar energy which ultimately
increase consumptions rates of fuel.

ELASTICITY OF SUPPLY AND DEMANDS

The demand curve of elasticity for demands increase looks as follows.

Prices

P
P1

D
Q

Q1 Quantity demand of oil

Elasticity of demand in Long run

From the figure,
6O % decrease in prices increase the consumptions of oil more than 60% is called
elasticity of demands. The demand curve looks like flatter in the long run.
The Elasticity of Supply in Short Run
The elasticity of supply looks inelastic in short run. It means decrease of price in oil by
60% affect less than 60% supply in oil in international market. If the oil producing company such
as OPEC decrease supply of oil by 60% than it is called unit elasticity of supply. These happens
because oil producing company does not want lose share market and they difficult to cut cost of
production such as labor. They cant forcefully fire labor and decrease salary of labor because of
government and international rules. To fulfill these cost, they supply oil in international as it is.
The inelasticity of supply curve looks as below. The supply curve becomes steeper in
short run.

ELASTICITY OF SUPPLY AND DEMANDS

6
S

Prices

P
P1

Q1 Q

Quantity demand of oil

Supply curve of oil in short run

Elasticity of Supply Curve in Long Run

The Supply curve of oil in longs runs looks elasticity. It means that 60% decrease in
prices of oil decrease the supply of oil more than 60%. In longs run, the oil producing company
has time to decrease labor or close down company that gives loss. Similarly, the government can
Prices
have
passed bill of low wage rate to sustain the company in market. The investor who invest high
S
capital in pumping take over their hand from this business that ultimately decrease the supply of
oil in thePinternational market. Therefore, supply curve follows elasticity of supply curve in long
run.

P1

The supply curve looks as flatter in the long run as follows in figure.

Q1

Q
Quantity demand of oil

Supply curve of oil in short run

ELASTICITY OF SUPPLY AND DEMANDS

In conclusions,
The elasticity of demand and supply curve looks inelasticity in short run and elasticity in
long run. Also, the decrease in prices of oil increase demands of oil and fulfills it in short run but
creates shortage in long run because of less supply of oil in the international market to minimize
cost of the production.

ELASTICITY OF SUPPLY AND DEMANDS

References
Economics. (2009). In Encyclopedia of Management (6th ed., pp. 211-215). Detroit: Gale.
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9af1108b214a2c214ce9b
Supply. (2008). In W. A. Darity, Jr. (Ed.), International Encyclopedia of the Social Sciences (2nd
ed., Vol. 8, pp. 227-229). Detroit: Macmillan Reference USA. Retrieved from
http://go.galegroup.com.ezp-02.lirn.net/ps/i.do?id=GALE
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3a31c4c9aeceff304d24
Guell, R. C. (2012). Issues In Economics Today. McGraw-Hill.
Krauss, C. (2016, January 22). OIl Prices: What's Behind the Drop? Simple Economics.
Retrieved from The New York Times:
http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?
_r=0