Q1. How do the demand and supply of oil behave differently in the long run and the short run?
In the short run, the demand and supply of oil is inelastic. So even if the prices increase the demand does not change too much. The reason for this is the time period given to consumers to respond to the change in price. Since itâ€™s the short run, it obviously means that people cannot immediately change their lifestyle and find suitable alternatives. Therefore in the short run the demand and supply of oil is inelastic. The reason for the supply to be inelastic is that oil is a difficult source to extract and even if there is an immediate need in the market for oil, which cannot be supplied ...view middle of the document...
The members of an oligopoly change the nature of a free market.Â While they can't dictate price and availability like a monopoly can, they often turn into friendly competitors, since it is inÂ all the members'Â interest toÂ maintain a stable market and profitable prices. In such cases, often a cartel is formed and firms in the market can become members. These cartels aim to stabilize the market for the product and to decide on the appropriate output and prices for the product.
Opec is also one such cartel in which member countries decide on the amount of oil to be produced and exported and on the prices they will charge for it. Opec is a very successful cartel because even though they do not have the power to control the market, the can strongly influence the prices in the market through their cartel. This shows us how successful the cartel really is. Opec is responsible for 40% of all oil exports in the world. This shows us their power in the market and this shows us that it is in fact a successful cartel. The only aim of opec is to stabilize the oil market and to deliver to customers at fair prices. It has every making of a successful cartel.
Q3. Oil prices fluctuate. Why did opec fail to keep the price high?
Contrary to popular belief, opec is not responsible for setting the oil price anymore. It may have a strong influence in the market but it cannot, alone, determine the price for oil. It can try to increase the price for oil by reducing the supply for it but that does not guarantee stable high prices. The reason being that when prices of oil will be high, more and more producers will enter the market for oil. When that happens the supply of oil in the market will increase causing the prices to fall.
In another case, we can also say that since in the long run the demand for and the supply of oil is elastic, opec may have found it unprofitable to maintain a high price. Since in the long run people can shift their needs to other sources rather then oil causing the increase in price to be ineffective.
Also, we all know that opec does control the oil market. It only has a share of 40% of crude oil in the world market. This means that even if opec wanted to maintain a high price, the other producers of oil may not have let them do that.
Q4. Study the nature of elasticity in the demand and supply of oil.
Elasticity can be defined as the change in demand in accordance to the change in price. Taking the case...