Economics Assignment: Crude Oil Price Elasticity, Ice Cream Market Analysis, Cost Curves, Unemployment, GDP and Monetary Policy

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the university
Author Note

(a) Short Run (b) Long Run
Price Price
Quantity Quantity
Figure 1:Short run and Long run elasticities
Source: Drawn by Author
Demand
Demand
Supply
Supply
1ECONOMICS ASSIGNMENT
Answer to Question 1
Crude oil is the most essential product that is required in all the sectors of the economy.
From manufacturing to transport the whole world is dependent on the different derivatives that are
derived from crude oil. In the present context crude oil is necessary good. The price elasticity of
demand measures the sensitivity or the responsiveness of the demand for crude oil with respect to
the changes in price. The price elasticity demand is calculated by the following formula,
e p=
∆ q
q
∆ p
p
=
∆ q
∆ p∗p
q
Where, q is the quantity demanded and p is the price level of the commodity. The value of
e pis calculated in mod values. The short-run price elasticity of crude oil is very low in absolute terms.
This means that it is highly price inelastic in short run. However, in the long run the price elasticities
are much higher than the short run values. This means that in the long run the price elasticity is less
inelastic than the short run (Baumeister & Peersman, 2013). The graphical analysis is provided
below.
The demand and the supply curve are having less slope in the long run as compared to that
in the short run. The main reason for a more steeply sloped demand curve in the short run is that in
the short run people do not have close substitutes to oil. However, in the long run due to

2ECONOMICS ASSIGNMENT
Quantity
Price
P
Q
Price Ceiling
P*
Excess Demand
Graph 2: Price Ceiling
Source: Author’s own creation
Demand
Supply
Qs Qd
technological advancement, substitutes like solar energy may reduce the over dependence on crude
oil. A slight change in price level may lead to huge changes in the quantity demanded for crude oil.
Thus, relatively more elastic in the long run and inelastic in the short run. Similarly, for the supply
curve in the short run even if the producers are making losses they will keep on producing. However,
in the long run producers might think of alternate choices and leave the business making an elastic
supply in the long run.
Answer to Question 2
Consider the market of ice cream. The demand and supply of the ice cream market are the
traditional downwards sloping demand and upwards sloping supply curve. The equilibrium price of
the market is at P and Q, where P is the price and Q is the quantity demanded. Now, suppose that
the government decides to put a binding price ceiling on the ice cream market. Consider that the
binding price is below the equilibrium price level. This will create an excess demand of ice creams in
the market. This phenomenon will result in various malpractices. The suppliers will tend to give the
produced goods to their near relatives and friends and the consumers in need of the good may miss
out. Another effect may be that the sellers might lower the quality of the goods produced. The
graphical analysis is provided below.
From the above diagram it can be clearly observed that the Qs is the quantity supplied and
Qd is the quantity demanded. Qd – Qs is the excess demand that is prevailing in the market. The
equilibrium price and quantity is at P and Q respectively.
Now consider for the welfare of the sellers the government decides to set a binding price
floor. Suppose that the price set by the government is more than that of the equilibrium price. This
will create an excess supply in the market for ice creams. The supply will be more than the demand.