Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 10 (3157 words) Published: December 20, 2011
Detailed Analysis

Negative Spill over effect
On 20 April 2010, the Deepwater Horizon blowout preventer failed to function causing an explosion at “Mississippi Canyon Block 252 in the Gulf of Mexico” (Washington’s Blog, 2010). The oil spill resulted in a negative spill over principle to the fishing industry, tourism, environmental. It was pointed out that “closed fishing areas included a zone off south-west Florida that includes waters just to the west of the Dry Tortugas, a small group of islands” Many tourists were scared to visit the five Gulf States: Texas, Louisiana, Mississippi, Alabama and Florida, due to the ruined environment. Besides, Louisiana Senator Mary Landrieu said that “120,000 jobs were threatened due to the new moratorium (delay or suspension) on deepwater drilling in the Gulf” (AFP, 2010, July 14). Price Elasticity of Demand of oil

It was stated that “Price Elasticity of Demand measures the responsiveness of quantity demanded of a good to a change in its own price.”(MIEC lecture handout: Ngee Ann Polytechnic). To measure if an item is price elasticity or not, we can use the following formula: Ed= % change in quantity demanded / % change in price.

If the magnitude of E is greater than 1 then it is price elastic. If the value of Ed disregarding the minus sign is lesser than 1, it is price inelastic. We can also determine the elasticity of good by using the determinants of price elasticity of demand which are availability of substitutes in consumption, proportion of income spent, time, habit and necessity against luxury. Oil is a necessity good as it is needed for cars as petrol, to cook food, as airplanes fuels etc. Hence, people have to purchase it no matter how much the price of oil increases. Moreover, the price of oil only increases just a little. Thus the proportion of income spent is only a small part of consumers. Due to these two determinants of price elasticity of demand, we can determine that demand for oil is price inelastic. Since demand is price inelastic, firms selling oil can increase the price of oil to increase their total revenue as there will only be a small percentage decrease in quantity demanded. Furthermore, people who are no longer confident in BP will buy oil from other oil companies (Chervon Corp, Exxon Mobil, and ConocoPhillips). At the same time, it also helps to increase other firms’ opportunities of earning extra revenue from those people. Supply of oil

Due to the spillage of oil into the seabed, oil supply by BP is greatly reduced. Since the supply of oil by BP is lessened by a lot, BP supply curve will shift to the left drastically. It was stated in the article that “about 750,000 barrels of oil had been collected or flared by containment systems by July 10 and plans were being developed which could allow up to 60,000-80,000 barrels per day to be collected” (BP oil leak bill increases, share price rises on assets sale talk, 2010, July). This suggests how much resource they had lost and have greatly affected their production. However in the oil market, the shift in supply curve is only very little, as BP is not the firm that produce the most amount of oil. In addition, there are other firms in the world that produce oil as well. For examples, big companies like Abu Dhabi, PetroChina, ExxonMobil, still have relatively large amount of oil supply. For instance, Abu Dhabi is situated in the Middle East which is known for being rich in oil and thus they are able to contribute more supplies of oil to the world, much more than BP. The determinants of supply includes the factor prices, price of related goods, technology, expectation of producers and number of sellers in the market. In this case, the supply of oil is determined by the number of sellers in the market. With the number of big companies still operating, the impact of BP is just a small one, so the supply curve for oil in the market will only shift slightly to the left. As a result the price of oil will just...
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