A Fall in the Price of Crude Oil and Price Elasticity of Demand
How does a fall in the price of crude oil impact quantity demanded?
A fall in the price of crude oil from $90 per barrel to $80 per barrel leads to an infinite fall in quantity demanded. Calculate the price elasticity of demand?
Answer:
If a fall in the price of crude oil from $90 per barrel to $80 per barrel leads to an infinite fall in quantity demanded, the price elasticity of demand would be infinite. Infinite elasticity, also known as perfect elasticity, is a scenario in which the quantity demanded shifts by an infinite amount in response to any price change at all. This extreme example shows that consumers are extremely sensitive to changes in price and will either buy everything or nothing at all depending on the price. The demand curve in this scenario would be perfectly elastic, indicating that quantity demanded will either go to infinity when the price decreases or drop to zero when the price increases. This demonstrates the "all or nothing" nature of perfectly elastic demand.
Explanation:
Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. When the price of crude oil falls from $90 to $80 per barrel, leading to an infinite fall in quantity demanded, it indicates that consumers are extremely sensitive to the price change. In this scenario, the price elasticity of demand is infinite, showing that quantity demanded changes by an infinite amount in response to any price change.
Perfect elasticity is an extreme case where the quantity demanded shifts infinitely in response to price changes. This extreme sensitivity to price indicates that consumers will either purchase everything or nothing at all when faced with a change in price. This concept highlights the importance of understanding how price changes affect consumer behavior and market dynamics.
In conclusion, the scenario of a fall in the price of crude oil leading to an infinite fall in quantity demanded demonstrates the concept of perfect elasticity and extreme consumer sensitivity to price changes. Understanding price elasticity of demand is crucial for businesses and policymakers to make informed decisions regarding pricing strategies and market dynamics.