Blog: ECO401 GDB solution

Total Marks 3

Starting Date : 

Tuesday, June 07, 2011

Closing Date : 

Thursday, June 09, 2011

Status Open Question/Description 

The major oil producing countries had made a cartel named “OPEC” (oil producing and exporting countries) in 1960. OPEC exports oil to rest of the world; there are significant problems for entrance in the market for oil. In which market structure this case falls and why the demand curve of oil is relatively inelastic?

NOTE:your answer must not exceed from 50 words.

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SOLUTION:

Part A: In which market structure this case falls?

Market structure: oligopoly

Part B: Why the demand curve of oil is relatively inelastic?

Oil Industry lies in the oligopolistic market structure which has few no of sellers in the market and people are bound to fulfill their needs through this limited supply, so price rise does not effect much on their demand. secondly the oligopolists are well aware of moves. That's why demand curve of oil is relatively inelastic.
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The major oil producing countries had made a cartel named “OPEC” (oil producing and exporting countries) in 1960. OPEC exports oil to rest of the world; there are significant problems for entrance in the market for oil. In which market structure this case falls and why the demand curve of oil is relatively inelastic?

Solution:

Market structure is oligopoly and cartel. During the recent crisis, personal consumption and incomes have fallen substantially and therefore, assuming the positive income elasticity of demand for oil, the world demand for oil decreased considerably. The change in the aggregate consumption of oil has led to relatively more price elastic demand for oil.