This document analyzes the reasons for variance in elasticity of demand for oil in different regions. It defines price elasticity of demand and explains that it can range from zero to infinity. Demand is more elastic when there are more substitutes, in the long run as habits can change, and for goods that are not necessities. Elasticity of supply can also be perfectly elastic, perfectly inelastic, or unit elastic. A reduction in the world oil supply will lead to a larger price increase in the short run when supply and demand are less elastic compared to the long run when they are more elastic.

1. Analyzing The Reasons
Variance in Elasticity of
Regions in Oil Price
Managerial Economics
SubmittedBy :- Ms. Prajakta Sawant
Roll No :- 2013022

2. Prepared by Prajakta Sawant
Roll No :- 2013022 Page 2
Analyzing The Reasons for Variance in Elasticity of Different Regions
Price elasticity of demand is a measure of how the quantity demanded of a product changes
when there is a change in the price of the product. It is calculated by dividing the percentage
change in quantity demanded by the percentage change in price.
Price of Elasticity of Demand = Percentage Change in quantity Demanded
Percentage Change in Price
PED can take a range of values:-
Zero - When PED is zero, demand is perfectly inelastic, a change in price of the product has no
effect on demand
Elasticity is Zero
Between zero and one - Demand is inelastic, a change in price of the product leads to a less
than proportionate change in demand.
Elasticity is Less than 1
Leads to decrease in quantity demanded

3. Prepared by Prajakta Sawant
Roll No :- 2013022 Page 3
Between one and infinity - Demand is Elastic, a change in price of the product leads to a
greater than proportionate change in demand.
Elasticity equals to Infinity
Infinity - demand is perfectly elastic, a change in price of the product causes demand to fall to
zero.
The determinants of demand are:
Number and closeness of substitutes - the more substitutes there are, the more elastic
demand will be because there are other alternatives
I. Time period considered -
1. Demand remains inelastic in the short run because consumers
take time to change their consumption habits.
2. However, in the long run, demand becomes more elastic as
consumers change their purchasing habits and consume
more/less of a product
 Whether the good is a necessity/addictive good - Demand remains inelastic for
necessity/addictive goods because people will continue to buy them even when there is a
price change.
 Necessity goods - because people need them they will buy them; addictive
goods - people are addicted and so they buy them even when price changes

4. Prepared by Prajakta Sawant
Roll No :- 2013022 Page 4
Elasticity of Supply :- There are three extreme cases of PES.
1. Perfectly elastic, where supply is infinite at any one price.
2. Perfectly inelastic, where only one quantity can be supplied.
3. Unit elasticity, which graphically is shown as a linear supply curve coming from the
origin.
Conclusion :- A Reduction in Supply in the World Market for Oil :- When the supply of oil falls,
the response depends upon Time Horizon. In the short run, supply and demand are relatively
inelastic,
(a) Thus, when the supply curve shifts from S1 to S2, the price rises substantially.
(b) By contrast, in the Long Run, supply and demand are relatively elastic. In this case, the same
size in shift in the supply curve S1 to S2 causes a smaller increase in the price.