the price of crude oil has been subject to wild fluctuations for many years.docx

7/28/2019 The price of crude oil has been subject to wild fluctuations for many years.docx

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The price of crude oil has been subject to wild fluctuations for many years. The price rose from US$50 at

the beginning of 2007 to nearly US$150 in the middle of 2008. Since then it has fallen very sharply to

less than US$50 per barrel in 2009. It has been estimated that the price elasticity of demand of oil is

about -0.1.

1. Define price elasticity of Demand (1 mark)2. Sketch the demand curve for oil (2 marks)3. What is the value of elasticity for a perfectly inelastic demand curve?

a. -1b. 0c. -0.1d. Infinity

4. What is the formula for calculating PED?5. Discuss how the demand for oil probably reacted to the dramatic price changes. (4 marks)6. To what extent does oil have substitutes? (6 marks)

In 1996, the average house price in the UK was about $75000. By 2007, prices had risen to around

$190000. The increase in prices had been fuelled by rising incomes and cheap mortgages. However,

throughout 2008 and into 2009 prices started to fall. At the beginning of 2009 the average house price

was around $155000. The fall in price was blamed on the global recession.

1. Draw a supply and demand diagram to show what caused house prices to rise between 1996and 2007.

2. Draw a diagram to show what happened to house prices throughout 2008 and 2009.3. The government in UK is keen to increase the nation's stock ok houses. Draw a diagram to show

the effect this would have on house prices.

4. Khaing: wanna help me with my hw again again?5. hein: yeh alright sure6. Khaing: The price of crude oil has been subject to wild fluctuations for many years. The price rose from

US$50 at the beginning of 2007 to nearly US$150 in the middle of 2008. Since then it has fallen verysharply to less than US$50 per barrel in 2009. It has been estimated that the price elasticity of demand ofoil is about -0.1.1. Define price elasticity of Demand (1 mark)2. Sketch the demand curve for oil (2 marks)3. What is the value of elasticity for a perfectly inelastic demand curve?a. -1b. 0c. -0.1d. Infinity4. What is the formula for calculating PED?5. Discuss how the demand for oil probably reacted to the dramatic price changes. (4 marks)6. To what extent does oil have substitutes? (6 marks)

7. i no 1 and 4 only8. hein: ohh ok9. so i'll start from 210. for the curve11. since it is very inelastic, u should draw the line almost vertical12. but not vertical13. that's it14. Khaing: slope = -0.1?


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15. hein: yes16. Khaing: ok17. hein: 3)18. it's 019. Khaing: ok20. hein: the slope shows the PED21. PED is zero if the good is perfectly inelastic22. 4)23. change in quantity demanded divided by change in price24. Khaing: ok25. hein: 5)26. the question gives 4 marks so u have to mention 4 important points..that's how it works in O level27. or A28. Khaing: ok29. hein: - oil is price inelastic30. - so according to the formula for PED, a change in price will lead to a less proportionate change in quantity

demanded31. -Therefore, the demand will not change too much even if there are large changes in price32. i'm not sure about the fourth point33. u probably should show it on a graph34. Khaing: ok35. so how do i draw a graph?36. hein: draw the graph u drew again37. Khaing: u mean in no 2?38. hein: and add a few things39. yes40. show that a change in price will lead to a smaller change in quantity demanded41. thats' it42. Khaing: ok43. hein: and uhm....question 644. - the availability of substitutes affects the PED of a good45. - the more the substitutes, the higher the value of PED46. - this is because there are fewer choices for the consumers47. - in the case of oil, it is price inelastic so it means that there are very few substitutes available for the

people to choose from

48. that point could be worth 2 marks, but i'm not sure49. Khaing: ok50. is dat all?51. hein: no...52. i'm still thinking what to write53. i cant think of anything else54. but i think u should add that are substitutes becoming available55. Khaing: ????56. what do u mean57. hein: the question asks TO WHAT EXTENT oil has substitutes58. Khaing: ok59. so i shud add that substitudes are becoming available?60. but how can they become available?61. hein: technology, mainly62. but i'm not sure,ok?63. it's quite irrelevant64. Khaing: ok65. so i shud add that as today's technology is becoming better, the substitudes of oil are becoming available?66. hein: yeh that's a good ans67. Khaing: ok68. there's another hw69. :)70. In 1996, the average house price in the UK was about $75000. By 2007, prices had risen to around

$190000. The increase in prices had been fuelled by rising incomes and cheap mortgages. However,


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throughout 2008 and into 2009 prices started to fall. At the beginning of 2009 the average house price wasaround $155000. The fall in price was blamed on the global recession.1. Draw a supply and demand diagram to show what caused house prices to rise between 1996 and 2007.2. Draw a diagram to show what happened to house prices throughout 2008 and 2009.3. The government in UK is keen to increase the nation's stock ok houses. Draw a diagram to show theeffect this would have on house prices.

71. hein: 1)72. draw a simple D-S diagram73. and show a rightward shift in demand74. and be sure to show that the price rises75. Khaing: ok76. hein: that's it i guess77. 2)78. draw another one, but this time a leftward shift in demand79. and show a decrease in price80. 3)81. draw another one82. show a rightward shift in SUPPLY83. and show that price decreases84. and explain a little why this happens in each graph85. Khaing: how do i explain them?86. hein: like, for question 1)87. the price increases cuz demand increases, which is caused by increased demand and low mortgages88. 2) the price decreases cuz demand decreases89. this is because the global recession put people out of jobs and their financial situation got worse90. 3) higher no. of houses supplied in the housing market91. Khaing: ok92. that's all rite?93. hein: yep94. Khaing: thx95. Sent at 4:57 PM on Wednesday96. hein: ur welcome

the price of crude oil has been subject to wild fluctuations for many years.docx

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