Question

Case-4

In the latter half of 2009, oil prices decreased by more than half. According to the Gulf countries government figures, demand for oil was low across the world. This low demand also put downward pressure on oil. As per a recent report, until 2022, the demand will continuously be low decreasing by 0.5%. Furthermore, the overall business confidence was weak, with a rising worry about whether the economy in the Gulf region would recover its negative growth. In addition, the substantial deficit in the governments was also estimated to increase which also will result increasing in cutbacks and taxes. The dramatic drop in oil prices around the world in 2015 is causing GCC Governments to review spending to ensure public projects are necessary, affordable, and efficient and to continue to diversify their economies. In order to control oil prices, oil-producing countries have to cut down the production of oil. However, analysts estimate that, at present, about one million barrels of oil are being produced over and above daily requirements. With supply remaining much higher than demand, prices have fallen.

Question-4

i) Explain why the demand for oil is relatively inelastic with respect to price.

ii) The outbreak of corona virus has affected the business of automobiles all over the world. How will it

affect the demand for oil? Explain

iii) If the price oil is decreasing and the supply remains the same, how will it affect the market

equilibrium? Explain.

iv) Using the concept of elasticity, explain how the price of oil affects the demand for cars.

Answer 1

Q 4 i)

Demand for oil is inelastic with respect to its price because oil in today's world is a necessity and every product which ha a necessary factor in it have an inelastic demand with respect to its price.

Q4 ii)

Oil & automobiles are complementary products for each other, so if demand for a product decreases it also results in decrease in demand for its complementary products.

If no of cars are decreased oil needed to run cars also will be demanded less.

So the demand for oil will also decrease.

Q4 iii)

We know that market equilibirium is a point at which both demand and supply for a product are equal at a given price so if price of oil is decreasing that means there is already lesser  demand than supply for oil and if supply is continued at same pace then market equilibirium for oil will reduce and people would like to buy oil at even a lesser price resulting in downward price spiral for oil which has been happening recently.

Q 4 iv)

Elasticity referes to level of demand change compared change in price of the product.

If a slight change in price of a good increases or decreases demand of a product very much it is called highly elastic demand whereas if demand of a product does not changes much even if price of a good has significant change than it is called inelastic demand.  

As mentioned in in Q 4 part ii cars & oil are complementary products so if price of oil decreases then demand for car and oil will increase and if there is increase in price of oil then demand for cars and oil will decrease, it is also called cross elasticity of demand.

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