Question

the graph below depicts a series of changes in the market for oil. the initial demand curve is d1, and the initial (short-run) supply curve is ssr. first, the demand for oil changes from d1 to d2. this leads to a price increase from $50 to $90. then, over time, supply becomes more elastic as represented by the supply curve changing from ssr to slr. this leads to a price drop from $90 to $80. what role does the elasticity of demand play in the price change from $90 to $80? inquizitive chapter 4

Answer 1

The role played by elasticity of demand play in the price change from $90 to $80 are:

• The more elastic the demand, the larger the price drop after the initial increase.
• The more elastic the demand, the smaller the long-run equilibrium quantity (Q3).

How does elasticity affect price ?

Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. If demand is relatively elastic (elastic demand), it means that consumers are very responsive to changes in price.

If the price increases from $50 to $90, consumers will reduce their quantity demanded significantly if the oil becomes more elastic, resulting in a larger price drop as firms try to maintain sales by lowering prices.