Price Elasticity of Demand: Assessment of Influencing Key Factors

Topics: Petroleum, Supply and demand, Elasticity Pages: 2 (624 words) Published: May 6, 2014
Assess the key factors affecting the Price elasticity of demand (PED) for Oil

Oil is widely used in most industries and mainly for petrol, this in itself is one of the factors which can influence the price elasticity of demand, the fact that oil is a necessity means that it is high in demand and therefore this affects the elasticity. Crude oil being a necessity is high in demand.

Another determinant of the price elasticity of demand would be how many substitutes there are. The larger the number of close substitutes for the good then the easier the household can shift to alternative goods if the price increases. Oil generally has fewer alternatives for main uses, such as petrol. The main products of crude oil are different types of fuels including diesel, kerosene, and naphtha and refinery gas. These fuels have few close substitutes that are in use. For example, for a good such as petrol which is extracted from crude oil, has only crop – based bio fuels and diesel as main substitutes; however it is important to consider that these resources are in composite demand and it therefore difficult to be able to have them in use as a petroleum substitute. That leaves only other means of transport such as buses, trains or walking, however these alternatives are not close substitutes, and the ‘closeness’ of the substitutes can also determine the elasticity. Other alternatives for petrol are in a research process and therefore are readily available in the market. The other products of crude oil are similar to petrol, in the sense of their scarce nature, few substitutes and high demand or necessity.

Therefore, it would be a clear judgement that crude oil is likely to be price inelastic. This is because the product has become an everyday necessity rather than a luxury and as there are so few substitutes, it is very difficult for consumers to respond to changes in price.

It can be argued that goods that account for a large proportion of disposable income tend to be...
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