Price Elasticity of Supply for Oil in a Changing Market
What is the price elasticity of supply for oil using the midpoint formula?
In this price range, what is the world supply of oil - Elastic or Inelastic?
Calculating Price Elasticity of Supply for Oil
The price elasticity of supply for oil in this scenario using the midpoint formula is approximately 1.21.
Elasticity of World Oil Supply
The world supply of oil in this price range is elastic.
When the price of oil increases from $45 to $56 per barrel, the quantity supplied significantly increases from 69 million barrels per day to 90 million barrels per day. This indicates that oil producers are quite responsive to price changes in this particular price range.
Calculating Price Elasticity of Supply for Oil
To calculate the price elasticity of supply using the midpoint formula, we need to determine the percentage change in quantity supplied divided by the percentage change in price.
Percentage change in quantity supplied:
Quantity Supplied at Price 1 (Q1) = 69 million barrels per day
Quantity Supplied at Price 2 (Q2) = 90 million barrels per day
Percentage change in quantity supplied = ((Q2 - Q1) / ((Q1 + Q2) / 2)) * 100
Percentage change in quantity supplied ≈ 26.42%
Next, we calculate the percentage change in price:
Price 1 (P1) = $45 per barrel
Price 2 (P2) = $56 per barrel
Percentage change in price = ((P2 - P1) / ((P1 + P2) / 2)) * 100
Percentage change in price ≈ 21.78%
Now, we can calculate the price elasticity of supply using the midpoint formula:
Price elasticity of supply = (Percentage change in quantity supplied) / (Percentage change in price)
Price elasticity of supply ≈ 1.21
Elasticity of World Oil Supply
Elasticity measures how responsive the quantity supplied is to changes in price. With a price elasticity of supply greater than 1, the percentage change in quantity supplied is proportionately greater than the percentage change in price.
This indicates that oil producers are responsive to price changes, and when the price of oil increases, they can significantly increase the quantity supplied, as seen by the increase from 69 million barrels per day to 90 million barrels per day.