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The Price Elasticity of Supply (PES) measures how a percentage change in quantity
supplied is affected by a percentage change in price. To find the PES, the percentage
change in quantity supplied (%Qs) is divided by the percentage change in price
(%P). There are 3 possible answers to this equation. If the answer is exactly 1, it is
said to be unit elastic. If the answer is more than 1, it is said to be elastic. If the
answer is between 0 and 1, it is said to be inelastic. Factors that may affect the PES
are the availability of producer substitutes and the option to use unused capacity. The
availability of producer substitutes affects the PES because if a producer is able to
substitute producing one good for another, it is said to be elastic. Examples of goods
that are producer substitutes are milk and yogurt. An example of a good that is not a
producer substitute and therefore inelastic are primary products like coffee. Primary
products are products that have no been refined in anyway. Unused capacity affects
the PES as if a producer is able to, at any time, make full use of their resources it is
said to be elastic. A farmer who has two plots of land and only uses one has an elastic
PES. If both plots are being used then the PES is inelastic.
The Price Elasticity of Demand (PED) measures how the percentage change in
quantity demanded is affected by the percentage change in price. To find the PED, the
percentage change in quantity demanded (%Qd) is divided by the percentage change
in price (%P). As in the PES, there are also 3 possible answers to the equation: unit
elastic, elastic and inelastic, all of which are the same as in the PES. Two major
factors that affect the PED are the addictive factor and the availability of consumer
substitutes. The addictive factor affects the PED as consumers need certain goods.
These goods often have no replacement, which causes them to be inelastic. An
example of an addictive good that is inelastic is cigarettes. The availability of
consumer substitutes affects the PED, much like the availability of producer
substitutes does to PES. If a good is not easily substituted then it is inelastic.
Both the PES and the PED of this article are inelastic. The PES is inelastic as there is
no availability of producer substitutes when it comes to refining oil. The machines
used specifically for refining cannot be used for anything else. Also the PES is
inelastic because suppliers are not able to use any of their unused capacity as they are
already using their ‘limited surplus capacity’ and with all the wage and labor
decreases, suppliers do not have an access to more labor at any time. The PED in this
article is inelastic because consumers need refined oil in their everyday lives. The lack
of availability of consumer substitutes makes the PED inelastic.
The price increase in oil has caused disequilibrium and a shortage. In Fig.1 the price
increases from Pe to P2. This increase in price causes disequilibrium as the quantity
demanded increases from Qe to Qd and the quantity supplied decreases from Qe to
Qs. This shortage is caused, as the quantity demanded is more than the quantity
supplied.
OPEC is the Organization of Petroleum Exporting Countries. Its main goal is to
achieve stable oil prices that are fair and reasonable for both producers and
consumers. OPEC influences oil prices as it keeps the market stable, so that in Fig.1,
there will be no disequilibrium. If the price of oil was to rise too high, consumers will
not be able to afford refined oil for their cars and their heating. This will mean that the
price will have to drop, so that there will be equilibrium.