Question

About 75 million barrels per day of oil were produced and consumed globally just prior to the war in Iraq, and the world market price (

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P) was $30 per barrel. At the beginning of the war, global oil production decreased by 10% to 67.5 million barrels per day. Simultaneously, the world market price increased by 20% to $36 per barrel. What is the price elasticity of demand for oil?

A) 0.5
B) 1
C) 1.5
D) 2

Answer 1

The price elasticity of demand for oil, when the quantity demanded changes by 10% due to a 20% price change, is calculated to be 0.5. This value indicates that the demand for oil is inelastic.

Step-by-step explanation:

To calculate the price elasticity of demand for oil, we use the percentage change in quantity demanded and the percentage change in price. The formula for price elasticity of demand is:

Price Elasticity of Demand (PED) = (% Change in Quantity Demanded) / (% Change in Price)

Initially, the production and consumption of oil were about 75 million barrels per day. After the production decreased by 10% due to the war, it dropped to 67.5 million barrels per day. This is a 10% decrease in quantity. Simultaneously, the price increased from $30 to $36 per barrel, which is a 20% increase in price.

Using the formula:

PED = (-10% / 20%) = -0.5

The negative sign indicates that the demand curve slopes downwards, but when discussing elasticity, we're concerned with the absolute value. Therefore, the price elasticity of demand for oil in this case is 0.5, which means that the demand for oil is relatively inelastic. So, the correct answer is A) 0.5.