One of the main concepts of microeconomics is the concept of price elasticity of demand. This particular concept is going to be considered in this research paper. The various ways how this concept is realized on practice and how it is applied to the real goods in the real economic conditions are going to be shown. To begin with, a definition of the term “price elasticity of demand” should be provided. One of the most appropriate definitions of this term is as following:
“Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity” (Investopedia, 2013).
In other words, price elasticity of demand shows how the amount of demand is going to change, because of the changes in a price of a good. Value of this indicator can be either negative or positive. However, price elasticity factor is positive only for some exceptions.
In order to explain the concept of price elasticity of demand we are going to analyze the following article The end of elastic oil by Tom Konrad. The author considers the concept of price elasticity of demand for oil.
Generally, it is considered that price elasticity of demand for oil is pretty low
It is possible because of the number of reasons. These reasons are the factors that define the degree of price elasticity. Price elasticity of demand depends on many factors. Among them the following ones may be pointed out: existence and availability of substitutes, importance in a budget, time, existence and availability of goods-complements, etc. For example, time is a very interesting factor. The more time customers have to adjust to changes in a price, the higher the price elasticity of demand will be.
However, more and more experts claim that price elasticity of demand for oil has decreased significantly in the recent years. The reasons for it are falling incomes of people (they do not have money to purchase oil), introduction of alternative fuel, ecologic concerns, etc. The author of the article under consideration supports the same opinion. This opinion can be proved by the following words:
“The reduction in fuel use that comes from people losing their jobs and no longer commuting to work also contributes to the elasticity of demand, and I mention it to highlight the point that while reductions in fuel use can be benign (properly inflated tires, for instance), they can also be harmful to the economy” (Konrad, 2012).
First of all, oil is very important good in life of any person
We cannot imagine our life without cars and other vehicles. Also, oil is broadly used in commerce and production. That is why it is simply impossible to get rid of this good, even in the conditions of the growing prices. It is probably the main factor that makes demand for oil inelastic nowadays. However, the author of the article claims that more and more alternatives to this traditional fuel are presented every year. The author believes that soon they will totally replace oil.
Secondly, there are only a few substitutes to this good. In fact, there are no competitive alternatives. A lot of institutions work to invent them, but they haven’t succeeded yet. The author of the article is convinced that people will choose more fuel efficient vehicles in the nearest future. Nowadays, such alternatives require significant financial expenditures. That is why not everyone is able to afford such a luxury. However, the trend is constantly changing.
Third, people need time to adjust to changes in the prices for oil
Alas, we don’t have such time, since we have to go to work. The author totally agrees with this opinion. That is why, he always claims that these changes are going to take a lot of time. He just says that the situation is changing, and price elasticity of demand for oil is becoming more elastic. Probably, we will forget about oil in 50 years.
Finally, expenditures on oil are not very significant in a family’s budget. Also, it is an important good. That is why families may ignore growing prices. The author says that we are living in the conditions of the global financial crisis. That is why people are forced to reduce expenditures on cars and transportation. Businesses are also not exception.
In conclusion, such principles of microeconomics as price elasticity of demand were considered in this research paper. Moreover, the ways how this principle is realized on practice were shown. Price elasticity of demand for oil has been analyzed. In fact, it is inelastic nowadays, because of the range of factors. That is why prices of oil are the crucial factor for the global economy. However, the factors are going to change in future, and the price elasticity of oil will become higher. It is going to decrease nations’ dependence on oil. Basically, it is good news for the world’s economy. This opinion has been proven by Tom Konrad in his article The end of elastic oil.