Tag: income elasticity of demand

Changes in the price of oil have effects throughout the economy. And it’s not just on the obvious things, such as petrol prices, energy bills and rail, bus and air fares. Most companies are significantly affected by the price of oil, as oil is a key input into their production, whether for transporting their inputs or the goods they produce, or as plastics or other petrochemicals. This is why the price of oil receives so much attention: we’re all affected by it. You will have seen the price of petrol changing dramatically over the past year or so and this is largely due to changing oil prices. The price of oil peaked at $147 a barrel in July 2008 and fell as low as $32 a barrel in December 2008.

So what is it that causes these changes in oil prices and what does it mean for the world’s economies? Read the following articles, which discuss these issues, and look at recent developments in the oil industry.

First fall in oil use since 1993 BBC News (10/6/09)
Trump’s world view Fox News, Interview between Greta van Susteren and Donald Trump (30/6/09) Oil settles above $71; China to boost reserves The Associated Press, Dirk Lammers (29/6/09)
Nigeria worries push up oil price BBC News (29/6/09)
Oil up to near $72 on dollar fall, Nigeria attack Town Hall, Pablo Gorondi (30/6/09)
Chinese demand forecast to boost oil price The Star Phoenix, Joanne Paulson (30/6/09)
Lower oil price hits Total profit BBC News (6/5/09)
Oil price hovers at $70 amid pipeline attacks Financial Times, Miles Johnson, Javier Blas, London (27/6/09)
What is going on in the oil market? BBC News (27/10/08)
Rising oil prices poses threat to recovery, Alistair Darling warns Telegraph (12/6/09)
Fears of oil crunch recede as recession knocks down global demand The Independent, Sarah Arnott (30/6/09)

Questions

  1. How is the price of oil determined? Give 2 examples of factors that could cause (a) the price of oil to increase and (b) the price of oil to decrease.
  2. How are company profits affected by the changing price of oil?
  3. OPEC is an oil cartel. What are the factors that make collusion more likely to succeed? Do they apply to OPEC?
  4. When prices of oil increase, why do we still use similar amounts of energy; still buy petrol? What’s so special about this commodity? Think about elasticity.
  5. How is the price and consumption of oil affected by the macroeconomic situation?

The financial crisis has, according to research from the Institute of Grocery Distribution (IGD), begun to lead to a fundamental change in shopping habits. People are now more ready to take packed lunches to work, walk rather than drive and even grow their own food to a greater extent than for many years.

Cash-strapped shoppers in search of Good Life Times Online (14/10/08)

Questions

1. With reference to the article, suggest products for which demand is likely to increase during an economic downturn.
2. Are all the products you identified in question 1 inferior products?
3. With reference to the article, suggest products for which demand is likely to decrease significantly during an economic downturn.
4. Comment on the likely value of the income elasticity of demand for each of the products you have identified in questions 1 and 2.