Oil Questions

Question 1

Apart from price, identify two factors which might affect the demand for oil (4)

Question 2

Using a demand and supply diagram explain why oil reached a price of $78.40 a barrel (6)

Question 3

Is demand for oil price elastic or inelastic, explain your answer (6)

Question 4

Explain what might happen to the revenue of an oil producer with increased demand and increased price (4)

Question 5

To what extent is the supply of oil elastic (12)

Elasticity along a demand curve

Today we looked at elasticity and different shaped demand curves. It is important to remember that the elasticity changes along a demand curve. It is easier to explain why using calcuations. This graph here taken from the s-cool economics website is really good at expalining why.



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To make the maths easy, I've drawn a curve that is 45 degrees to the horizontal. Where the demand curve hits the y-axis, the price is 20, and where the demand curve hits the x-axis, the quantity demanded is 20.

Now look at the change going on at point A. The price fell from 19 to 18 (a 5% fall, approximately) causing the demand to rise from 1 to 2 (a 100% increase). This gives an elasticity of (-)20 which is very elastic.
At point B, the price fall from 10 to 9 represents a 10% fall, and the resulting rise in the quantity demanded from 10 to 11 represents a 10% rise. The elasticity, therefore, is unitary.

At point C, the price fell from 2 to 1 (a 50% fall) causing a rise in demand from 18 to 19 (a 6% rise, approximately). This gives an elasticity of (-)0.12, which is very inelastic.
So, every part of the demand curve above (or to the left) of point B will be elastic, and every point below (or to the right) of point B will be inelastic. Straight-line downward sloping demand curves are most elastic at the top. The elasticity then continually falls as one moves down the curve, reaching unitary elasticity somewhere in the middle. Past this point, the curve becomes inelastic, reaching a value of zero when the curve hits the x-axis.

Wheat Prices

 The price of wheat has risen dramatically over the past two years as shown in the graph.

In the exam you will need to be able to explain the causes, effects and solutions of this rise in price… Remember changes in price don't just happen, they are a result of demand and supply side issues. Growing populations and extreme weather conditions have all played their part. Read this article here to find out about the causes of rising food prices.

Impact of rising food prices

Examiners like to ask you about the impacts of rising prices.
These videos here will give you some ideas.

Video 1

Video 2

Video 3

Tasks:

1. Draw a demand and supply diagram explaining why the price of wheat has increased
(6 marks)

2. Evaluate the impact of rising wheat prices on the following groups (14 marks)

Think about the effect on different groups - farmers, manufacturers who use wheat, consumers.