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Old 04-17-2007, 07:35 PM   #1
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Any economists here?

I found this paper, as wondering what a elasticity of -0.034 to -0.077 indicates in terms of price/demand. For instance, gasoline obviously has some floor for production, but if demand we cut by 10-20% for one year, what would that do to the price? Would it fall all the way to the floor? Or for that matter, if the average member of this site cuts their consumption by 30%, they'll save that much money on a personal level, but given gasoline's lack of elasticity, how much will the reduce the profit made by the sale of that gasoline?

I'm not sure if I'm interpreting this correctly, but if a resource has an elasticity of -.1, and demand drops by .0001 percent, wouldn't that mean price would drop by .001 percent, assuming supply stays the same?
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Old 04-18-2007, 06:41 AM   #2
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Petroleum prices are not established simply by traditional "supply and demand" curves.

1) OPEC (particularly Saudi Arabia) controls the supply side, and manage it to maintain prices. Saudi Arabia recently announced that the price of oil should be approximately $60 per barrel. If you follow prices as I do at ino.com, you can see it hasn't varied too far from that target recently.

2) Risk premiums are built into oil futures. A good part of the price of oil is due to buyer "hedging", i.e. purchasing oil prior to actual usage. That's one of the main reasons why oil prices rise when some political event occurs in the middle East, Nigeria, Venezuela, or other major oil producer. Perceived risk to supply goes up, and so does the price.

It's not simple supply and demand in oil.
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Old 04-18-2007, 03:53 PM   #3
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Of course that's supply and demand. Even if supply and demand are rigged by bidness, and whatnot... A drop in supply should still spur the proportional increase in price, just like a drop in demand would spur the proportional decrease in price. I'm just wondering if my short term assumption was correct...
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Old 04-19-2007, 09:57 PM   #4
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Quote:
Originally Posted by omgwtfbyobbq View Post
I found this paper, as wondering what a elasticity of -0.034 to -0.077 indicates in terms of price/demand. For instance, gasoline obviously has some floor for production, but if demand we cut by 10-20% for one year, what would that do to the price?
You can find the whole paper if you search on the name. Although I'm not an economist, I did read a couple of wikipedia articles.

The paper is talking about price affecting demand. So no telling how demand affects price. The negative elasticity means higher price reduces demand. It's percent over percent, so a 100% increase in price equals a 3.4%-7.7% decrease in demand. They don't mean actual decreases (because it didn't), they mean deviation from what they think demand would have been with no increase.

The more important part: price affects demand 10 times less than it did 25 years ago. Also in the report: higher incomes tend to increase the elasticity. So more money means more options to reduce demand.
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